Pandora.com facing the end?

Internet RadioI’ve made no secret of the fact that I like Pandora.com. The internet radio service is one of my two favorite (iLike is the other) ways to discover new music. Pandora might be shutting down soon however.

With the increase in royalty rates dictated by the CRB recently, Pandora is facing a situation in which 70% of their revenue will be eaten up by song royalties. That doesn’t leave a lot for paying the bills, and staff, let alone expansion.

Founder Tim Westergren says Pandora’s funding comes from venture capitalists who won’t be inspired to continue supporting a business who’s revenue model is broken.

We’re losing money as it is. The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we’re doing is wasting money. We’re funded by venture capital. They’re not going to chase a company whose business model has been broken. So if it doesn’t feel like its headed towards a solution, we’re done.

Jon Simson, of SoundExchange, has said Pandora needs to adopt a new business model that includes audio ads placed between songs, if it is to survive as a viable business. Pandora, however, doesn’t seem to keen on that idea. Pandora’s thinkers feel that such a model would be a turn off for listeners and simply drive them away.

Pandora is hoping for relief from Washington lawmakers, who they are hoping will alter the royalty system as it currently stands. They feel the disparity in revenue percentages paid by internet radio (70-300% depending on which internet station you talk to), when compared with satellite radio (6%) or terrestrial radio (0%), is unfair and should be amended.

On the other hand, SoundExchange points out that satellite radio brings in a total revenue of $115 per listener per year, whereas internet radio stations average only $3.50 per listener per year. Their argument is that the percentage must be higher to generate a similar amount of royalties for a similar amount of listening. The thought process being, if the internet radio stations can’t figure out how to earn income, that’s no one’s fault but their own.

On the one hand, I understand the sentiment. If I were the creator of a product, which others sold, and one retailer sold it for a price I liked while another told me they needed a steep discount because they couldn’t sell it for much, I might choose not to sell to that retailer.

On the other hand, at a time when the industry is hemorrhaging due to slumping CD sales, some revenue is better than none. I don’t buy the argument that the industry needs time to develop, it’s had the time and just hasn’t developed a revenue model that will generate the kind of royalty rate SoundExchange would like to see. But they are generating a royalty. 25% of something, is more than 70% of nothing.

  • RobS

    As someone who only recently discovered Pandora, I was disappointed to see this news. I really like the service and have found it to be a good way to discover new music. I think I’d prefer paying a small membership fee over having ads placed between songs.

  • Rob,

    I agree, I don’t want to listen to ads in between songs. A small membership fee might be acceptable. It would eliminate some users who won’t pay it, and increase revenue on a per-listener basis. I don’t know if I personally would continue to use the service if I had to pay for it. I’d have to think about that. I do know that I’ve used the service to discover new music, which I’ve then purchased either on disc or through iTunes. So, in my mind, Pandora is not only providing me with a service, it’s providing the artists (and songwriters and labels by extension) a service as well by introducing new customers to their products. Maybe they don’t want people knowing about their music?

  • ryan

    We recently launched an internet radio platform called Highnote which we feel is the scalable business model for streaming music. The idea is to bring artists and listeners together. What’s unique is the promotional platform we’re building which is targeted and performance based, with no irrelevant ads. Labels and independent artists get promotional exposure for their new music in the most natural way ‚Äì played directly after artists that are similar. Ex: I am an unsigned artist that cites Alison Krauss as an influence, I can promote my track into streams after listeners hear an Alison Krauss song. The crucial thing here is that revenue is cost-per-click based rather than cost-per-play… so a) bands/labels pay only for qualified traffic to their web sites which can then be monetized as the artist/label pleases and b) click-through rates and user response regulate the degree to which a promoted song gets wider play into music streams. No ads, just music, and just the type of music the listener wants to hear. The bluegrass feed on the site is at:

    http://www.highnoteradio.com/station/genre/4

    Feedback welcome.

  • Pingback: Pandora Radio and Ben’s Chili Bowl « More to Come…The DJB Blog()