This is a critical point that keeps coming up about Pandora, a company whose pursuit of lowered royalties is now becoming obsessive. According to a comparative research report released today by economist Jeffrey Eisenach, Pandora’s royalty rates are completely reasonable — and oftentimes lower — than other retailers that purchase and repackage materials from other producers.
So, Pandora is a ‘retailer’? Quite simply, yes: they take materials created by others (ie, songwriters, labels, musicians) and repackage those in order to make a margin. Step outside of the music royalty bubble for one second, and it turns out that Pandora is actually getting a pretty good deal.
“There is nothing unfair, onerous, uneconomic or surprising about the fact that ‘retailers’ like Pandora – companies that take goods made by others and sell them to consumers – pass through much of their revenue to people who make the goods in the first place (in this case, music creators).”
All of which brings us to the meat of Eisenbach’s finding. Because not only does Pandora not need a royalty break, they are purposely delaying profitability in favor of growth – like so many other successful internet gambles. “Pandora is now telling the markets that it has achieved critical mass, is ready to ‘monetize’ its ‘dominant’ market share, and expects to break even or earn a profit this year,” Eisenbach asserted.
“The reason the company has not earned a profit on a traditional accounting basis is not because of royalties, but rather because it has followed a conscious (and highly successful) strategy of investing in growth and market share.”
But Eisenbach argues further, noting that Pandora is already an extremely successful company. The reason is that original investors like Walden Venture Capital and Greylock Partners have already made hundreds of millions on Pandora, and top executives like Tim Westergren have already cashed out more than $15 million. “Such returns are precisely the signals entrepreneurs and financiers look for when deciding where to invest time, ingenuity, and money.”
“Not surprisingly, there is no shortage of new investment in internet radio…”
Actually, Pandora is even more successful than that. Eisenbach dug even deeper, and found very compelling evidence that Pandora is already heading towards profitability (oppressive royalties and all). “The fact that revenues are going up faster than listener hours is crucial, since royalties are a direct function of the latter,” Eisenbach stated.
And will you just look at this…
“The argument that high royalties have prevented Pandora from achieving profitability is specious.”
The complete report is here.
Written while listening to Kromestar.