The issue is long-standing royalty rate discrimination against internet radio. As each new form of radio was invented (including cable and satellite radio), new legislation was passed but only addressed the new form. The result is dramatically different royalty rates: satellite pays about 7.5% of revenues and cable pays about 15%, while Pandora pays more than 50% of revenue in royalties. The inequity in how different digital radio formats are treated under the law when it comes to setting royalties is a clear case of legislation falling behind advances in technology. The current law penalizes new media and is astonishingly unfair to internet radio.

This has long been a problem. Lots of history here.

The royalty system for Internet Radio has always been broken. Internet Radio stations are required to pay several kinds of royalties that traditional FM broadcast stations and satellite based radio stations are not required to pay. The recording industry negotiated themselves a bigger pie slice on the Internet through a process that included shutting down a large number of stations in the summer of 2002 (including SOMA FM) because the industry didn't think those stations were big enough to bother allowing them to exist and its leadership has no concept of how things in technology grow over time.

Why doesn't the government have consistent policies for this?

The answer is Realpolitik - nascent Internet services don't have the negotiating position of the ClearChannels of the world, and the RIAA is too myopic to understand that they are strangling new revenue streams in the cradle.

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