Is internet radio completely broken? It's getting harder not to ask that question: Pandora is one of the biggest streaming radio services on the planet, yet it's struggling to pay its royalty bills, it can't even enter the UK, and it can't convince Wall Street to take it seriously. And now, the company is telling Wall Street that it's unlikely to be profitable until at least early 2013 - that is, best case scenario.
But is this really Pandora's fault? You can argue all day about what a content owner deserves to be paid. But what if it's simply impossible to build a business around those rates? This is what Pandora warned investors as part of its annual SEC filing, released just days ago.
"Since our inception in 2000, we have incurred significant net operating losses and, as of January 31st, 2012, we had an accumulated deficit of $101.4 million. A key element of our strategy is to increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses.
Part of the problem is that Pandora derives 87 percent of its revenue from advertising, according to figures shared by the company in March. Pandora's been trying (rather unsuccessfully) to diversify into premium subscriber services, but it also finds itself dealing with considerable consumer resistance to paying for music (and especially radio) online.
On top of that, Pandora is dealing with SoundExchange royalty structures that seem to be killing - not facilitating - the online radio market. And this is just horrific math: streaming rates are increasing, not decreasing, and the more listeners Pandora acquires, the greater its royalty obligations become. Which means that if per-stream royalty rates aren't reexamined or restructured, one of the greatest companies to enter this space may simply be unable to survive long-term.
(chart by Bloomberg)
mike Monday, April 02, 2012
Grim but not surprising.
Terrestrial radio is struggling. internet radio has higher costs, lower ad load, lower ad rates, and more restrictions on playback.
Soundexchange is killing the future to protect a dying past - an all too familiar refrain in digital media.
It's worth noting that pandora would pay even higher rates if it were not using the compulsory licenses. No wonder spotify is raising another $200m for the labels...err, for operations.
Jason Monday, April 02, 2012
Richard Tuesday, April 03, 2012
the percentage apple retains is immaterial - they generate 99$c per sale. Pandora won't be pulling those kind of revs from their end users. The ad funded model just doesn't work in today's climate. maybe 30 years ago....
John Monday, April 02, 2012
This all ties back to the original negotiation a select few people had when the new Sound Exchange deals were created. Westergren, Hanson, Radioio. They had poor vision on how that deal would affect them and everyone else that now has to also adhere to their terrible agreement. They had no practical business acumen and are now suffering for that.
The deal should never have had a "whichever is higher" payment clause which compares gross revenue to pay per song per user. I mean really, whose idea was that????
"Hung by their own petard" as my mother would say. Typical of the music industry which never fails to miss an opportunity to fail.
Blastjacket Monday, April 02, 2012
John Monday, April 02, 2012
@Blast: you're right, the music industry doesn't have to "support" new business models, but Pandora isn't just any new business model. It's a new direction and enormous opportunity for music promotion and all interested parties should work together so both can make a profit from it, not bleed it until it runs dry.
Pandora exists because music fans want more variety than what terrestrial radio provides. It's not an "on demand" service, it's a "deeper playlist" service, and I would not put them in the same bucket as Spotify - which I believe will burn out as others have before it.
Pandora on the other hand, has built up the largest internet radio listener base and provides a service that is very well liked and received. Labels and artists should applaud this and work at finding a solution where both sides can succeed for the long term. Asking investors to shoulder the loss won't last forever.
Econ Monday, April 02, 2012
As a person who uses pandora et al for their deeper playlist functionality, I have to say that most users of those services do not use it for that.
From my experience, I'd say over 80% of the users are pumping out the same hits terrestrial radio is playing. The main attraction is/was avoiding the commercial load. Personally, I'll put up with commercials so I can tailor my listening experience but I am the exception rather than the rule.
Richard Monday, April 02, 2012
I don't understand your thought process. You criticise Spotify, relentlessly, for low royalties. Yet in this post, you effectively conclude that SoundExchange needs to lower it's rates to keep this company afloat.
paul Monday, April 02, 2012
Richard, I'm not sure I'm the one 'relentlessly' criticizing Spotify here, I'll leave that to artists like the Black Keys and lots of other concerned artists, manager, and labels. Though, I am facilitating a forum for discussion on this important topic.
In this matter, I'm really trying ask a question about the state of internet radio. If Pandora is having difficulty surviving, is this a very obvious memo about royalty structures here? In the UK, the situation precludes Pandora from even entering, and streaming radio has been hampered in that country because the various parties cannot work out workable terms. Here, we have to ask serious questions about whether Pandora will make it long term, yet I'm not sure we'd want to blame its very smart leaders like Tim Westergren or Joe Kennedy for that situation.
So I'm mostly trying to ask the question of whether this status quo is effective. I want artists to get paid like everyone else, however, an unhealthy Pandora may not be the best way to achieve that.
Just Another Voice Monday, April 02, 2012
I've been in radio in one form or another for over thirty years. I'm also a consultant and/or general contractor for music festivals and venues with music - including munincipalities.
A book can be written on this subject, so a forum like this is just too little space to do more than exact a "sound bite" from anyone.
The entire issue has almost nothing to do per se with Pandora, or Spotify, or Sirius, or even the "evil" Clear Channel -- it has to do with history and expectations based on historical precedent.
The problem seems to have more to do with antiquated copyright laws and who pays how much to whom for the use of copyrighted content.
When munincipalites are charged royalty rates, even when they do not have music in their buildings and offices, etc, there's a disconnect.
When concert promoters (venue operators) are charged royalty rates despite a willingness to provide written documentation that no ASCAP or BMI or SESAC music is being used - there's a disconnect.
When songwriters are paid on arbitrary formulas based on statistical extrapolations of quarterly airplay playlists, there's a disconnect.
When non-terrestrial broadcasts of music are charged differently than strictly terrestrial broadcasts are, there's a disconnect.
When the original royalty system was created it as to protect the interests of the songwriter - as the musicians were originally contract labor and were not paid residual earnings based on repeated broadcast performances of the recordings they appeared on.
We as consumers have come to expect that we can get our music for free on broadcast radio and television. As consumers we do not THINK about who pays for the music to be aired, or who gets paid. We just think it's free, because that's the way it's always been. We bitch about advertising, but we tolerate it because we're getting our content for "free."
Another disconnect is the belief held by musicians in general that airplay equates to record sales. In the paper "THE ELUSIVE SYMBIOSIS: THE IMPACT OF RADIO ON THE RECORD INDUSTRY" STAN J. LIEBOWITZ writes "In the United States radio broadcasters have no obligations whatsoever to the copyright owners of the sound recordings (although they do have obligations to the copyright holders of the music contained in the sound recording). The reason for this discrepancy appears to be that radio broadcasters have argued, and it is generally accepted, that radio play beneﬁts record sales and thus there is no need for radio broadcasters to purchase the rights to broadcast the sound recording. This impact of radio play on record sales is commonly referred to as a “symbiotic” relationship between these two industries. Yet there appears to be no systematic examination of this relationship. In this paper I present evidence indicating that radio play does not beneﬁt overall record sales. There are obvious implications for copyright."
hank alrich Monday, April 02, 2012
So many folks seem to think the issue is that content providers want too much money. The people who actually write the songs are not the villians here. The issue is that the public can't seem to live without music, but the public is not willing to pay for music.
In the long run the public will get what it deserves: crap sound whether over the air or via the airwaves, and "music" products born of focus groups and Wall Street marketing efforts.
That this "new" music will suck in comparison to much of what we have enjoyed over the previous several generations of humans almost goes without saying.
Joe Tuesday, April 03, 2012
Where have be been? New music already sucks. 90% of what I listen to is the same old music I've always had.
Joe Tuesday, April 03, 2012
Where have you been? New music already sucks. 90% of what I listen to is the same old music I've always had.
tony r. Monday, April 02, 2012
They have attempted to increase revenues by partnering with premier companies like DMX, but even so, they're not going to increase revenues that much $10-$12 at a time (DMX charges $25 per location for this service so I would imagine the markup would be about 100%). They're going to need a lot more affiliate relationships like this if they're going to make it.
@YannaBeau Monday, April 02, 2012
Not sure how Pandora is staying afloat but bless them.
casual observer Monday, April 02, 2012
Until Pandora (and other internet music streamers) can come up with a third-party measurement that's accepted by advertising agencies, they won't be able to properly monetize their audience. Pandora could simply encode their streams for PPM measurement by Arbitron but appear to have reservations about that move, either because the numbers would be lower or due to the cost of subscribing to Arbitron.
They noted this point in their recent SEC filing when they said "While we have been working with third-party measurement service providers, these providers have not yet developed uniform measurement systems that comprehensively measure the reach and usage of our service. We expect that in the future these providers will begin to publish increasingly reliable information about the reach and usage of our service. However, until then, in order to demonstrate to potential advertisters the benefits of our service, we must supplement third-party measurement data with our internal research, which may be perceived as less valuable than third-party numbers. If such third-party measurement providers report lower metrics than we do, or if there is wide variance among reported metrics, our ability to convince advertisers of the benefits of our service could be adversely affected."
A recent research study from Bridge Ratings also points to issues listeners have with Pandora.
Bridge Ratings new study update: "Pandora User
Satisfaction Study" conducted between January 3 and March 15, 2012,
compares Pandora prime users's (monthly users) satisfaction with the
"Highly satisfied" percentages have been falling since 2010. Reasons given for less satisfaction are:
1. Commercial Interruptions spoil mood
2. Becoming predictable
3. Song choice is limited
4. Song choice for my taste not as good
5. Diminishing number of likeable songs
6. Repetition of Artists I don't care for
Frugal Mom Monday, April 02, 2012
It often seems to me that if different Internet entities would consider charging a minimal amount (say $1/month:$12/year for an account instead of $5/month; $60/year), many people would pay it. How many people listen to Pandora? I would gladly pay $1/month to be able to listen to the music they provide.
Joe Tuesday, April 03, 2012
$1/mo is not enough to be profitable given the royalty rates they must pay
Hughsbayou Monday, April 02, 2012
In the old days people would pay to be played on the radio. That aside, I don't use Pandora because I prefer NPR or some such station that uses a human being to filter the music presented.
Visitor Monday, April 02, 2012
The royalty rates are not the issue. The business model is the issue. The rates are STATUTORY becuase the law, industry and rightsholders have decided what it should be, and made it LAW for good reason. I like Pandora, it's a fine service. But if the model doesn't work, then the model doesnt work. why talk about renegotiating royalty rates in order to keep a model operating that is failing? That's cart before the horse. It's like changing freight prices because a physical distributor can't afford to pay for shipping...
Old News Monday, April 02, 2012
Pandora already broke this bad news nearly a month ago. See that sharp drop in the Bloomberg chart? That's investors taking into account lower revenue and earnings in the next fiscal year.
@OnPoint_El Monday, April 02, 2012
*sells shares of stocks*
@thornybleeder Monday, April 02, 2012
@theloganshow Monday, April 02, 2012
No real surprise here.
John_Packel Monday, April 02, 2012
This is a fascinating discussion. I love Pandora and have been meaning to subscribe, as it's where I discover a lot of the music I then playlist on Spotify. Will do so right now.
@plugola Tuesday, April 03, 2012
@phil_bonanno Tuesday, April 03, 2012
love the offer, hate the business model
@tokyodawn Thursday, April 05, 2012
Pandora still not profitable after 12 years. $100,000,000 total deficit!
หำน้อย Thursday, May 17, 2012
I am getting tired of using their service already.
Too many interruption, it keeps saying "are you still listening?"
very annoying. They should look at netflix as the model otherwise just get lost.
Ray Monday, July 16, 2012
The fact that http://pandora.com now does not load in ANYGOOD RIDDANCE browser, to them