Are Artists Subsidizing Pandora’s Lack of Profitability?

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.

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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…

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“The argument that high royalties have prevented Pandora from achieving profitability is specious.”

The complete report is here.

Written while listening to Kromestar.

11 Responses

  1. Lance

    Interesting article.

    Mostly because:

    a)I is entirely biased and was funded by MusicFIRST ,specifically to oppose Pandora’s efforts to change the royalty rate-setting process,

    b) It incomprehensibly compares a radio station’s royalty obligations with wholesale costs for hard-goods retailers – while notably COMPLETELY AVOIDING the fact that Panora pays SIGNIFICANTLY HIGHER higher royalty rates than other BROADCASTERS (that sould be um, even remotely-similarly situated businesses… the ones we SHOULD be comparing Pandora too) and

    c) It is clear that the author himself doesn’t even understand the copyright law or compulsory royalty scheme that Pandora pays under, remarkably noting that “The notion that there is a shortage of investment, entry or competition in Internet radio is not consistent with the facts…” while reporting that “…30 ‘major’ Internet music and radio providers, including Spotify, Rdio and, broadcaster-affiliated serviceslike iHeartRadio (a subsidiary of ClearChannel Communications) and CBS radio, as well as Google and Apple have entered the Internet radio market with proprietary platforms.”

    Our world-class economist-author is too uninformed aout the topic to know that NONE of these “competitors” pays the same rates, under the same license as Pandora.

    Are you ever going to try to populate this site with actual unbiased information, written by people who know what tye are talking about?

    Or is that too much to ask from your handlers at the RIAA oops, sorry! – “MusicFIRST”?

  2. earbits

    I hate to rock the boat here but I supposed that makes DMN a retailer, too, right?

    I mean, this is someone else’s content repackaged and sold to us, no? How much did you pay for that article you repackaged, Paul?

    😉

      • GGG

        I would like $.0035 per pageview for articles I comment on. Including this one.

        • Paul Resnikoff

          I’m going to purchase the Rapid City Bugle to avoid paying these oppressive rates.

          • earbits

            You probably should. Hypebot and 15 more of your top 19 competitors pays less than you for this same content.

          • Paul Resnikoff

            Not to mention that the Huffington Post doesn’t even have to pay its bloggers? I just want parity.

  3. Visitor

    When you do that, I’ll be sure to glide right past the fact that we AUTHORS (and our chosen representavies) CHOSE, FOR OURSELVES, to give the Rapid City Bugle a better deal than DMN – and instead just jump headlong into mis-characterizing the purchase as um, “you” ehhh… “gaming the system.”

    That’s fair, right?

  4. silly rabbit

    Pandora is not a retailer, just like GM is not a retailer.

    GM sells cars to dealers (retailers) from parts GM buys and assembles into a finished product. Pandora buys parts (songs) and assembles them into a finished product (1 or more hour listening sessions).

    The question is how much the parts are worth?

    If somebody told GM that the price of tires (an essential piece of a car) depends on the price of the car, or the number of times the tire is used by the end user, GM would find it impossible to make cars. To keep the analogy going, if the tire maker tells GM that the rubber provider wants a cut too, but that GM has to negoiate that deal separately, it would be awful hard to build a car. That’s Pandora’s plight.

    If Pandora can figure it out, they should make a 300% profit margin because they just performed a miracle.

    • back into the rabbit hole

      “Automotive retailer” means, “dealer”. So, they pay for the car from the factory then re-sell it with a markup.

      But even your GM analogy is horrible — the more cars GM sells the more it pays for tires, GPS systems, glass, and whatever else.

      What about dealers that lease vehicles and have variable costs ? You see it’s just differences in how costs apply.

      • that's the wrong hole

        Actually, the more cars GM makes, the less it pays PER part (like tires), and the more aggregate money the parts manufacturer makes because it sells more parts–well, at least in the real world.

        Now back to our analogy world, the part manufacturer tells GM it is making too many cars and is insulted that GM fails to acknolwedge that without tires there would be no car. The entire value of the car is therefore the tires.

        The tire maker then tells GM that it is entitled to set any price it wants for a tire (the tire maker suggests $1290 each for new release or $999 for unpopular tires, or 107% of the retail price whichever is greater), and if GM doesn’t like it, GM should stop making cars because there is no other source of tires. And, by the way, GM, if you chose to move forward, the rubber makers are still your problem and they want the same deal as the tire makers because you can’t have tires without rubber.

        I don’t think it’s a bad analogy. The more I use it the better it seems to get. I am sure I will see you WALKING around town someday since GM is out of business. I will be wearing leather soled shoes because the f’ing rubber guys shut the shoe industry down too.