The episode is just the latest flare-up in a long-running rumble over royalty rates in the digital age. This should mean a sober debate on economics and policy — but this is the music industry, so instead we get lies, invective and propaganda from all sides. That’s why we’re offering a plain English Q&A of what the fuss is all about. (If you’re just here for Pink Floyd, skip to the end for a treat).

Update: Pandora founder Tim Westergen has written a forceful response, saying the recent attacks are an orchestrated campaign by the RIAA and that a number of the claims — such as Pandora advocating for an 85% pay cut — are flat out wrong.

Why is Pink Floyd attacking Pandora?

Roger Waters and his mates say that the internet radio service wants to trick musicians into supporting a law that will cut their income by 85%. The band and others like Cracker’s David Lowery claim Pandora wants to use their songs to get rich without paying a fair share. Specifically, the bands are mad that Pandora is promoting a law that would reduce the amount of royalties it has to pay whenever it plays a song.

What does Pandora say?

Pandora, which has around 70 million monthly users, is upset that it pays higher royalty rates than other types of radio services. For instance, unlike AM/FM stations, Pandora has to pay not just songwriters but also the musicians who performs the songs. And, unlike satellite services like Sirius XM, which pay a “fair return,” Pandora must pay “open market” rates as determined by a panel of questionable legitimacy.

The company also believes the music industry discriminates against it in favor of internet services like iHeart Radio, which is controlled by big radio incumbent Clear Channel. The royalty rate issue is a make-or-break issue for Pandora, which reported that 80 percent of its revenue last quarter went to content acquisition (Pink Floyd counters this is like a grocery stores complaining most of its income goes to food acquisition).

Why is this coming to a head now?

Last year, the music lobby beat back a proposed law called the “Internet Radio Fairness Act.” The legislation, championed by Pandora, would have created some consistency across a crazy patchwork of radio laws that set out different rules and rates for different types of radio technology.

But, as Billboard noted, the Radio Fairness Act isn’t dead — it’s just hibernating. The law was introduced too late in the legislative cycle to pass the last Congress, and so Pandora and others are likely ramping up to try again (and are using stunts like buying an FM radio station to get a point across). The Pink Floyd article, therefore, appears to be part of a larger PR strategy to undercut momentum for the law.

Is a new law the only way to resolve this?

The fight over the law is just one part of a multi-pronged battle that also includes the courts (where Pandora is suing one of the royalty collection societies) and an agency called the Copyright Royalty Board. Public opinion, shaped by the likes of Pink Floyd and Pandora’s volatile CEO, Joe Kennedy, will also have a hand in how all this turns out. Meanwhile, the stakes will only get higher as new players like iTunes Radio enter the internet market.

So who’s right — Pink Floyd or Pandora?

They both have a point. On one hand, it seems absurd that the royalty rate for a radio song should be different based on what sort of device it is played on: “Wish You Were Here” is great no matter if it plays on Pandora, Sirius or an old-school FM station. There seems to be no logical reason to discriminate against Pandora simply because it uses the internet as a delivery device.

As for the musicians, they are right to be concerned about dwindling royalties. The money they used to earn from CDs and records has dropped off a cliff and income from iTunes or Pandora is not making up for it.

Ultimately, this is a choice about how America wants to subsidize its musicians and other artists. On one hand, the multi-layered royalty system developed in the 20th century is not holding up well, and copyright law has become corrupt and over-extended — it makes sense to scrap parts of this system. But on the other hand, though Pink Floyd is doing just fine, it’s not clear if there is enough money in the system to support and develop young musicians.

The good news is that Pink Floyd and others are earning new revenue streams thanks to the likes of YouTube. Here they are playing “Echoes” at Pompeii (skip to the 3 minute mark — so good) :

That means it will be possible to get Sirius XM feeds in a Ford: the live channel feed delivered from the heavens and an on-demand programming and tailored MySXM music streams from a cellular connection passing through your smartphone. It appears customers can opt for either both services, depending on which subscription or subscriptions they buy.

Spotify told Bloomberg it has “no announcements to share at this time,” but:

The new format would be similar to Pandora’s, which operates like radio and is cheaper to operate because royalty rates are lower and set by Congress.

The new service would start by year-end and be supported by advertising, said the people, who weren’t authorized to talk publicly. The company has begun notifying some content partners of its plans, they said.

In the most recent figures released, Spotify said it has 10 million registered users worldwide and three million paying subscribers. Pandora has 150 million registered users.

Spotify already offers a radio feature on its desktop app, but it is not mobile yet.

Bloomberg explains Pandora users “have access to any artist whose music has been published, because the service operates under federal rules. Royalties paid by Pandora and other online radio companies are set by the Copyright Royalty Board, a division of the Library of Congress.” So a radio service would allow Spotify to offer some music it doesn’t have the rights to already, and could also pull needed advertisers to the platform.

DAR.fm, which launched yesterday, offers users access to 600 radio stations and thousands of shows. A standard DAR.fm account gives a user two gigabytes of storage, which Robertson says can hold up to 100 hours of internet-radio programming. That’s because internet radio streams typically stream at a lower sound quality than MP3′s that are downloaded from iTunes or another source.

The service is both cost-free and ad-free for now; further down the road, Robertson says he’ll think about how to make money off the service, and says advertising is likely to be a key part of that.

There are other services that record internet radio, such as Radioshift. Robertson is hoping his service will have an advantage by storing music in the cloud, and offering support for a wide array of home and mobile devices.

“We’re excited about it because we think it modernizes radio, which really hasn’t changed in 100 years. This makes radio on-demand and interactive.”

Robertson’s last project cloud-based music projects-storage service MP3tunes.com, and MP3 search engine Sideload.com-were accused of violation copyright law by the EMI record label back in 2007. The case was argued in January and a decision in that case could come any day now.

He first acquired fame in the online music space by creating MP3.com, one of the first cloud-based music services. That company had to shut down after litigation brought by Universal Music Group. His chances of winning the current case are greatly improved, however; the legal landscape in this area has changed, especially after court victories by both YouTube and Veoh. Today, Google (NSDQ: GOOG), Microsoft (NSDQ: MSFT), and Apple (NSDQ: AAPL) all offer ways to store music files in the cloud as well.