Pandora’s Faces Serious Long-Term Sustainability Questions

Remember: the founder of Pandora — the guy who’s supposed to believe in this company the most — is dumping more than a million dollars of his own stock a month.  And yes, this is clearly documented.

Tim Westergren’s no dummy, even if he’s treating every musician and investor like one.  And they don’t call it insider trading for nothing: Westergren understands the vulnerabilities and nuances of internet radio better than anyone; he’s undoubtedly considered the long-term potential and competitive threats.

Like iTunes Radio, as potent a Pandora killer as they come.  And reason as any to lose faith in the long-term ‘business model’ that Pandora is trying to salvage.

Consider these fatal problems.

(1) Direct licensing is deadly poison to Pandora.  Yet it’s growing more popular, and becoming more possible than ever.

Apple signed direct deals with all the major labels for iTunes Radio, they aren’t beholden to government-mandated compulsory licensing rates and bad bureaucracy.  Which raises the question: what if Pandora were forced to do the same?

They’d probably end up paying a lot more, that’s what.  Which is exactly the opposite result Pandora is trying to accomplish.  And why Pandora is spending so much money and effort trying to lower rates on Capitol Hill.

Suddenly, this makes even less sense than before.  With iTunes Radio, Apple is paying full, directly-licensed fare (reportedly higher with advances and rev-sharing on ads), while Pandora pays the government rate.  So Congress should save little Pandora from Apple, because one can afford the raw materials and the other can’t?

(2) The reality: Apple can afford this, Pandora can’t.  Apple has a business model, Pandora doesn’t.

Apple can foot the bill, they can afford to overpay if it drives more iPad sales.  They can even afford to share low-rent advertising revenues and make this a break-even iTunes feature.  Sort of like the iTunes Store.

Pandora, on the other hand, remains committed to living on advertising and a small amount of subscription revenue.  This isn’t a loss leader for anything else, it’s all about monetizing internet radio directly.  And that’s difficult, especially for a company that remains heavily-resistant to a paid subscription model, or anything else that lowers their massive audience numbers.

Which means, the entire Pandora model is dependent on some government handout to survive.

(3) Apple’s radio service will be better.

Direct licensing means Apple won’t be hamstrung by the provisions of those established rates, like skip or playback restrictions.  Let’s see exactly how this pans out on iTunes Radio, though listeners will probably notice.

(4) Everything dies, especially on the internet.

Pandora clocks more than a billion listener hours a month; they account for nearly 8 percent of overall radio listening hours.  But everything dies eventually, especially on the internet.

Of course, users aren’t going to rush over to iTunes Radio, Pandora has too many established users; this isn’t Twitter #music.  But erosion happens.

(5) Even if Pandora’s listener base doubles overnight, they can’t afford it.

Again, this is a model that only works with a government handout, which would explain recent-quarter losses of nearly $30 million (over just three months).  But Pandora can only lobby and bribe Congress so much; they can only sue publishers and battle Sony/ATV until there needs to be a sustainable model underneath.

And on the publishing side, Sony/ATV has already squeezed Pandora as much as logically possible.  Other publishers, large and small, are next.  And the larger publishers have to power to severely reduce Pandora’s playable catalog if the deal doesn’t make sense.

Which means it’s not just Apple that’s going to kill Pandora, it’s the entire idea that billions of ad-supported streaming hours somehow makes business sense.  It doesn’t right now, and it won’t in five years.

Pandora: Dead by 2018.

List of Killers: Apple, publishers, Congress, consumers, Wall Street, Pandora executives.

26 Responses

  1. Avatar
    Me

    What if Pandora were to partner with somebody like Microsoft or Google? If iTunes radio is only going to be available on iOS, then this could fill a void for other mobile operating systems.

    • Avatar
      brian mellblom

      Since Amazon sells digital downloads and is venturing into movie and tv streaming, it wouldn’t surprise me if they bid for Pandora.
      Apple is banking on benefitting from the “Buy on iTunes” button alongside every song on iTunes Radio, and Amazon could certainly do the same with their own music download store. And if you’ve tried using Spotify Radio in place of Pandora, you know that not all internet radio algorithms are the same as the Music Genome Project.

      • Avatar
        Casey

        Pandora’s high valuation would make a buyout too costly.

  2. Avatar
    brian mellblom

    I’ll give it a shot. I’ll have full, ad-free access to my music library that won’t fit on my iPhone, and it’s cheaper than Spotify where I’m paying for access to a ton of music I’ll never even consider listening to. Let’s run the numbers:
    12 months of Spotify Premium: $119.88
    12 months of iTunes Match: $27.99
    Difference: $94.89
    $94.89/$1.29: ~73 singles with enough replay value to get me to buy them
    We’ll just have to see how well the Radio works compared to Pandora, Spotify, and the rest of ’em. That, and, y’know, my mobile data plan…

    But economically speaking, it sounds like a viable alternative to Spotify Premium, especially if Spotify Free stays free and ad-supported on my home computer.

    • Avatar
      brian mellblom (correction)

      12 months of iTunes Match: $24.99, NOT $27.99.

      Fixed that for me. Finger slipped on numeric keypad. Always some little mundane detail…

    • Avatar
      Casey

      With Itunes match you are paying to listen to music you already own. What good is that when you can slip a 32GB SD card in your phone and never have to pay a cent in data charges? Seems like a waste of $25 to me.

      • Avatar
        brian mellblom

        I know. And that’s more effort.

        The time saved is worth more to me than $24.99 per year.

    • Avatar
      Playlists

      Quick forgot that iTunes Radio doesnt let you choose what songs to listen to…. only a very limited group of playlists. Its less of a Personalised Radio and more of a group of Playlists!

    • Avatar
      Down With DMN

      “isnt it funny how thats the headline put together for the top news on pandora??!!”
      That’s exactly the problem. This drecht shoots to the top of Google and everyone things it’s gospel.

  3. Avatar
    Casey

    Pandora’s death was predicted when Spotify entered the US. It was predicted when Iheart’s custom channels launched. When Turntable.fm launched. When Songza relaunched. Yet the company lives on, stronger than ever. Apple’s radio service may make an impact. But it won’t kill it. Not even close. Pandora dominates as the leading radio source in the workplace. It is not even known if Apple’s radio service will even have a web player. Pandora supports all platforms. All mobile devices. All desktop OS’, including Linux, FreeBSD, etc. All radio sound systems. Nearly every set-top box and smart tv. Countless automobiles. Apple’s radio service will be restricted to iOS, iTunes software, and possibly other Apple products. That leaves out the majority of devices, and leaves them with strong competition on their home turf. Apple has no chance of taking significant marketshare.
    The reality is ad supported does make sense. Ads have supported businesses for years. TV, traditional radio, websites, games, etc. The fact that the product is streaming music is irrelevant. TV shows cost a lot more to pay for than some little song royalties. The ad revenue for a desktop PC listener for Pandora is significant and much higher than the royalties. Mobile is where the problem is. The revenue is lower because of an ad shortage and lower paying ads. But that is changing. If Pandora can move their plans forward and get mobile revenue up to what desktop revenue is, they would be very profitable.

    • Avatar
      Visitor

      well put sir. love it when people can see the true economic workings of how businesses thrive. and are not fooled by a measly attempt to sway a market.
      isnt it funny how thats the headline put together for the top news on pandora??!!
      funny i painted a completely different picture from the “news” about apples radio. this was already annouced weeks back and look what happened…only a small portion ran from pandora. scared the big apple giant is gonna move in and take over. same goes for netflix…these guys are miles ahead of their repective races. little side note**pandora went from early years 05′ ish til about 2011 and acquired 100 m listeners. and here it is 2 years later and theyve doubled that number. 200Million listeners. thats quite the headstart. what i found interesting was the claim that Pandora is solely dependant on congress’ decision. not only will they be content w lowering the royalties rates for pandora, apple has put quite the dent in the record labels wallets for the past 10 years. not only will they not offer them the same rates as pandora, , they might not offer it at all

    • Avatar
      John Eppstein

      Ad supported only makes sense when you can charge enough for advertising to support your business model. The internet has proven to be extremely poor at that; internet advertising is not nearly as effective as advertising in traditional media was and revenues reflect that. This is why so many internet based companies that use an ad based model rely on selling content that they don’t pay a fair amount for – essentially they survive by ripping off the industries that create their content. That’s what has gutted the music industry and is threatening other parts of the creative sector.

      Apple is one of the only companies that appears to understand that you have to support the content creators, otherwise you won’t have much of anything to sell. Spotify and Pandora certainly don’t – they’re trying to sqeeze more concessions out of a creative community that has already been squeezed dry as a bone. Functionally they’re not really much better than legal pirates.

      • Avatar
        jw

        Ad supported only makes sense when you can charge enough for advertising to support your business model.
        This is the root of the issue. It’s not Pandora’s model that is bogus, it’s the state of internet advertising.
        The whole internet treats advertising like a giant “McDonalds at the next exit! 3 miles away!” billboard on the interstate. But the reality is that internet users aren’t a captive audience in the same way that a traveler is, & 99.99% of things advertised on the internet aren’t solving as pressing a problem as “Where am I going to stop and pee?” or “Where am I going to get my next 65oz Dr Pepper?” or “Where can I get my kids a happy meal so I can get some peace & quiet for a few minutes?” That expectation, that a user should act on an advertisement immediately, which is fundamental to the entire internet economy, is much more often than not the wrong expectation.
        Traditional advertising relies on exposure… you go where users are & then you hold them hostage for a moment & then let them on their merry way. The idea that users, on a path towards their desired content, should click something & go away to somewhere else where they’re voluntarily marketed to is just… it’s a bizarre notion that treats people like idiots. That advertisements should COMPETE with the content that users are seeking out is insane… the expectation that advertisements should alter the trajectory of a consumer’s web consumption, rather than simply interrupting it, is a losing proposition, & that presupposition is what makes a perfectly reasonable product like Pandora, which SHOULD by any reasonable assessment be swimming in cash, difficult or even impossible to sustain.
        The truth of the matter is that internet radio advertising is no less effective than traditional radio advertising. And in fact it’s more valuable because you can precisely target who you’re marketing to, rather than wasting your ads on listeners who would never be interested in your product. And any interaction should be icing on the cake, not the expected result of the ad. All of that should make perfect sense to every single person reading it.
        There should be TONS less advertising on the internet. And it should all cost more. Passing a user on to a marketing experience should be a huge bonus on top of the value of the ad merely being displayed or played. And companies like Pandora, Spotify, etc., who have really great models, should have no problem paying their bills.
        At least that’s how I see it.

    • Avatar
      Songwriter

      The problem is that there are almost no ads on Pandora free version compared to all of the above examples. Because of that, there is too little in ad revenues and too little incentive for most people to pay the subscription.
      Spotify can’t or won’t pay decent royalties with their model which is why a lot of music you look for can’t be found there. Like many digital business models, theirs is based on trying to force/coerce people into working virtually for nothing. A lot of people have worked too hard, for too long and invested too much to give it all away so they refuse to participate.

  4. Avatar
    Just A Fan

    Maybe their future is great, but any company in any industry whose CEO is dumping stock at that rate should and will raise serious doubts among investors. It optics are baaaaaaaad.
    Anyway Apples offering may be different. Pandora supposedly differs because its internal logic….if you like Modest Mouse, you must like…Justin Bieber. If you like Panterra, you must like….Justin Bieber.

    • Avatar
      Fiscal 4Q12 and Fiscal Year 20

      wouldnt let me paste that down in the message board, so my appologies…but if u cant read it, just pull up pandoras revenues for the past few years … steady increase every year.so i dont know if “dumping” stock is the right way to call it. ifads will be the ones coming to the end. as all fads do. once u guys look up one day and realized uve been scammed into buying the same product, only thinner,and mini-er, and touch-ier, and the iphone 17 is pretty damn close to the iphone2, oh….and not to mention if u ever get on a samsung product and realize what uve been missing! so perhaps dumping isnt what we’re looking for…instead id like to think of it as, reinvesting. pandora has produced at a loss for several quarters in a row now. and yet their stock rises…wonder why?? bc w increases in listeners and revenue increases like that, its right around the corner for the tides to turn, royalties will drop, profits will skyrocket, and pandora will be awarded the throne to a revolutionary change in how we get to enjoy music.

  5. Avatar
    bizman

    ‘Tim Westegren’s no dummy, even if he’s treating every musician and investor like one.’
    Hey, even the most obscure music streaming service providers are doing the same! I can understand how the poor musicians may be mislead but the investors really need to wisen up. Any company who has not broken even within five years of it’s inception should be avoided as a prudent investment. They will always be a very high risk for your money even if they produce the occasional profit.
    It’s amazing how investors are still drawn to these companies, it must be the promise of life after death that they are being made!

  6. Avatar
    Blancoyo

    I can’t be the first person to point this out, but even if not it bears repeating; DMN’s focus on Pandora has grown truly obsessive, shrill-ly hostile, and a bit predictible. There’s a line between thorough coverage of the range of industry players and consistent vendetta that it seems DMN is creeping up close to lately. Granted, I’m not in the inudstry in any respect outside of loving music. And I express this view out of gratitude. I’m a big fan and quite grateful for the daily (!) news and analysis.

  7. Avatar
    Nate

    Pandora Responds
    “Apple’s new feature is an evolution of their iTunes offering to bring it on par with other streaming music services that have added radio into their feature sets. We have spent the last 13 years singularly focused on redefining radio and benefit from unrivaled intellectual property, deep experience in delivering personalized playlists, and ubiquitous product availability across every platform. We make it effortless for our more than 200 million registered users to connect with the music they love anytime, anywhere.”

  8. Avatar
    Thank You Biancoyo

    Biancoyo: finally, this has needed to have been said for awhile… DMN has a huge issue with Pandora. As I usually find myself saying as I read yet another DMN headline punishing Pandora, I ask myself, “What other service – internet radio or not – is doing ANYTHING for new artists, exposure-wise or otherwise?” Do people really think that Apple/iRadio is the key to helping the music business and/or up-and-coming artists? Pandora might be flawed in some ways, but come on people, IHeart is owned by Clear Channel. Is that who the readership of DMN puts their faith in? Say what you want about Westergren, but the guy was playing in piano bars and nannying while he started the genome project by himself. Maybe he’s not Steve Jobs but he’s also not a stand-in for the deep pockets of Wall St OR K Street. Let’s get real about how capitalism works, OK? “Dumping stock” also means continuing to invest in your company to try to help it survive the corporate monoliths’ bloodthirsty, incessant, repeated attempts to bulldoze the little guy.

    • Avatar
      Dry Roasted

      ” “Dumping stock” also means continuing to invest in your company to try to help it survive the corporate monoliths’ bloodthirsty, incessant, repeated attempts to bulldoze the little guy. ”
      Uh-huh.

  9. Avatar
    findyourflo

    Some strong points here. Not looking good for the P.

  10. Avatar
    Nope

    One word: Andorid
    Android is more popular than iOS and and the gap is increasing quite fast. If iTunes Radio only works on Apple devices, it will be a non-starter.

    • Avatar
      jw

      Apple doesn’t care about Android users… they aren’t relevant to the discussion. Apple only wants to feed it’s own ecosystem, & it’s proven it can make boatloads of cash doing so… to suggest that iTunes Radio needs Android users is to completely misunderstand Apple & what their motivations are.
      iTunes Radio could never have a single Android user & be a 100% success for Apple. However, if iTunes Radio takes off & Pandora loses their iPhone/iPad/iPod user base, they’re in huge trouble.

  11. Avatar
    LSR

    Looks like the consumer benefits from government handouts rather than the perogatives of oligopoly capitalists. I’m certainly not celebrating this development. I’m in this for me – the consumer – not some fat-cat copyright assignee. Is the author the former or the latter?