How Come No One Calls Out Pandora For False Promise Of Profitability?

from the celebrating-too-soon? dept

Tue, Feb 15th 2011 1:43pm — Mike Masnick

I'm a Pandora fan. I like the service and use it sometimes. However, I remember being surprised about a year ago when the company claimed that it was profitable. It had celebrated settling its royalty fight with the RIAA/SoundExchange by saying that the agreement allowed it to become profitable, but just doing some back of the envelope math, I couldn't figure out where that profitability came from. Last year, when I saw someone from Pandora speak about how they had something like 100 salespeople all selling ads, the numbers still didn't make that much sense. That many sales people is really expensive, and knowing the online ad business, I had trouble fitting the math in line as to how the company could possibly be profitable. Between the licensing, bandwidth and staff costs, unless they were getting insanely high ad rates, it just didn't add up.

And, yet, there were various media reports insisting the company was profitable. TechCrunch, Mashable, Hypebot, News.com and others excitedly talked up how Pandora had gone from almost shutting down to profitability by the end of 2009, and all seemed to think it was a foregone conclusion that, as Pandora promised, it was going to be profitable in 2010.

Yet, on Friday, Pandora filed for a $100 million IPO, and the filings show that the company is still a long way from profitability. And, now, the company that talked up how profitable it was going to be in 2010 is claiming it might not really be profitable until the end of 2012 or later.

As expected, the SoundExchange agreement is not at all reasonable -- representing a huge chunk of Pandora's expenses -- 45% of its revenue went to SoundExchange in the first 9 months of 2010. On top of that, Pandora is currently in another fight with ASCAP, who wants a bigger chunk than it was already getting as well. And, of course, Pandora is stuck in the US unless it can negotiate better rates around the globe. Basically, copyright costs are making it so that an otherwise useful service is unlikely to survive. You can read the full S-1 if you'd like to see more.

I do hope that Pandora figures out a way to survive, and continues to improve its service. However, I'm curious why so many folks in the press were happy to claim that the company was profitable, and cheered on the fact that it was going to be profitable for 2010, when the reality shows that it still has a long way to go before it'll really be profitable.

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Filed Under: ipo, journalism, profitability
Companies: pandora

34 Comments

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Hephaestus (profile), 15 Feb 2011 @ 1:28pm

This was so expected ...
Yet another online music business that is going to be taken out by the greed of the record labels and collection societies. Unless the collection societies go for bulk distribution and reduced costs they are going to cause their own demise.
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Anonymous Coward, 15 Feb 2011 @ 1:51pm

Re: This was so expected ...
Actually not so. With the deals in place, they are forecasting profits. Most manufacturing companies would be thrilled if their raw materials costs were so low.
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downdurnst, 15 Feb 2011 @ 2:08pm

Where did their #'s come from?
Mike-- I'm curious if you know where their claims to profitability came from? While they very well could have just been spinning moonbeams for the press, in most of these cases it seems like they are saying "We're profitable**", without telling you exactly what the ** entails. So assuming they didn't just straight lie to the press, what numbers did they manipulate to get to the 'we're profitable' shtick?

I'm a big fan of Pandora, and also of Slacker who I'm sure isn't profitable yet either - I'm hoping they survive, but if not, well then I'll go back to being an immoral kitten drowning piratical downloader hell-bent on world destruction via the mechanism of bittorent. Thanks RIAA & ASCAP, I was just starting to like my kitten too.
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anonymous, 15 Feb 2011 @ 2:13pm

Profitable
if you actually read the S-1, you'll find they are profitable and that the economics are actually pretty good, much better than I thought they would be. Their fiscal year ends on Jan 31, so their 2010 fiscal year is a full year old (it's really 2009). If you look at what they've done in 2010, they actually did turn a profit. Their content acquisition costs are only 45% of revenue, that's not bad. most retailers have gross margins that are a lot lower than pandora's. as they continue to scale their SG&A costs, they should actually have a pretty nice business.
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The Infamous Joe (profile), 15 Feb 2011 @ 2:16pm

Re: Re: This was so expected ...
Would they be thrilled if those raw materials were infinitely available and still took 45% of their profit?

Would they be thrilled if using those raw materials actually benefited the makers of said raw materials as much, if not more, as it benefits Pandora?

Would they be thrilled if those same raw materials cost a fraction of the cost if "on the internet" were removed from their business?
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Erik, 15 Feb 2011 @ 2:17pm

Apple's new 30% royalty on iOS subscription services is really going to cut Pandora's balls off.

Of course Apple probably wants to kill Pandora.
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Mike Masnick (profile), 15 Feb 2011 @ 2:30pm

Re: Profitable
Their fiscal year ends on Jan 31, so their 2010 fiscal year is a full year old (it's really 2009). If you look at what they've done in 2010, they actually did turn a profit.

No. They didn't. There's an operating profit, but that's not the same thing... They're not quite as close to profitability as they want you to believe.
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David Liu (profile), 15 Feb 2011 @ 2:32pm

Re:
Actually Apple is only taking 30% royalty on the app itself (i.e. the royalty they take for bringing a user to the service.) After that, subscriptions go 100% to the service itself, and Apple takes nothing from it.
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David Liu (profile), 15 Feb 2011 @ 2:34pm

Re: Re:
Wait, ignore me entirely. I read the rules horribly horribly wrong. God I wish there was a edit option.
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Anonymous Coward, 15 Feb 2011 @ 2:44pm

Food for thought:

Many salespoeple in the U.S. are 100% commission.
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Pixelation, 15 Feb 2011 @ 2:48pm

I too would like to see Pandora survive. I would also like to see the *AAssholes and ASHAT, I mean ASCAP, go under. Leeches. I no longer buy music because of these greedy jerks. I don't pirate it either.
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Qritiqal (profile), 15 Feb 2011 @ 2:49pm

Re: Re: This was so expected ...
I agree with AC on this one. I think ANYONE using any music in any way for their business should be required BY LAW to give 45% of their revenue to the copyright holders. :-)

I also think that anyone using the music for personal use should give 45% of their GROSS income to the copyright holder.

After all, we should be so lucky to get such a valuable raw material so cheap!
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Anonymous Coward, 15 Feb 2011 @ 3:09pm

Re: Re: Profitable
TD Dictionary:

operating profit != real profit
copyright laws != real laws
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The Infamous Joe (profile), 15 Feb 2011 @ 3:13pm

Re:
At least one subscription service is pushing back.
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Norm (profile), 15 Feb 2011 @ 3:15pm

Paid Service
I'm surprised that they don't market their paid subscription more. $36 per year is a small price to pay for what it offers. Although, part of the reason I pay it is because I like ther service and what to see them prosper. I would think that if more people joined the subscription model they would have an easier time being profitable.

Given that, does anyone know the margin between the revanue from adds compared to the subscription? Obviously the amount of time listened would have a huge effect, so assume ~50 hours a month.
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Justin, 15 Feb 2011 @ 3:27pm

Let the Content Groups do it on their own.
If the Content groups (RIAA, ASCAP, ...) think that it is their content that is the real value in the online music space, and the other company (Pandora, Spotify, ...) is just trying to cash in on their work, Why don't the content groups cut out the middle man and create their own online music service?

The fact that they have not done this yet, seems to be a pretty good sign they have an idea of what the true value of each part is and are just too greedy to think long term and what the best solution is for everybody.
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Anonymous Coward, 15 Feb 2011 @ 3:39pm

Re: Re: Re: This was so expected ...
Umm, the material isn't infinite. Last time I looked, there are a limited number of songs by each artist. They are far from infinite. Copies may be more infinite, but the originals are rarer than an honest techdirt post.
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Anonymous Coward, 15 Feb 2011 @ 3:43pm

Re: Re: Re: This was so expected ...
Your sarcasm is sort of misdirected.

The point is that the music is their raw materials. Without those materials, pandora is, well, an empty box. It would be like the sound of silence with the volume turned down.

Pandora could choose to work only with artists who don't have label or publishing deals, and who specifically release their work through CC licensing, but then again, would anyone actually tune in? Probably very few people. Pandora understands what is required to make their business go, and pays for the rights as they see fit.

It is against the rights holder's best interests to take them out of business. But it is also not in their best interest to grant license cheaply either.

So be as sarcastic as you like, but business is business.
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Anonymous Coward, 15 Feb 2011 @ 3:43pm

Re: Re: Profitable
How exactly did you get your MBA?
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The Infamous Joe (profile), 15 Feb 2011 @ 3:54pm

Re: Re: Re: Re: This was so expected ...
Last time I looked, there are a limited number of songs by each artist.

Oh! I didn't realize that Pandora only pays for each song once! That makes it much more reasonable! I was under the impression that they had to pay per song, per stream! You can easily see why that would seem to be ridiculous, I'm sure. Now that I know that they only pay for each different song once, it makes much more sense! I don't understand why those big whiners are complaining about having to pay for each song once. Talk about ungrateful!

Thanks for setting me straight! :)
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The Infamous Joe (profile), 15 Feb 2011 @ 4:00pm

Re: Re: Re: Re: This was so expected ...
Without those materials, pandora is, well, an empty box.

As someone already stated, if that was true the labels could easily cut out the "middle man" and stream the music themselves, and get 100% of the profits.

They don't because Pandora adds value.
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coldbrew, 15 Feb 2011 @ 4:16pm

Re: Paid Service
They do break it out, and for their most recent 9 months:
86% adverts
14% subs

[page 49 of the S-1]
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Nick Coghlan (profile), 15 Feb 2011 @ 5:26pm

Re: Re: Re: Profitable
To most people "real profit = net profit", so yes, Mike is right. Operating profit and net profit are only the same thing if your interest and tax expenses are zero.
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Anonymous Coward, 15 Feb 2011 @ 7:15pm

Re: Re: Re: Re: Re: This was so expected ...
Where did you get that from?

Are you intentionally trying to misunderstand?
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Anonymous Coward, 15 Feb 2011 @ 7:17pm

Re: Re: Re: Re: This was so expected ...
Pandora could choose to work only with artists who don't have label or publishing deals, and who specifically release their work through CC licensing, but then again, would anyone actually tune in?

Probably yes, Jamendo seems to be doing pretty well and so do Magnatune.

Pandora should die, since they only have that copycrap music there.
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The Infamous Joe (profile), 15 Feb 2011 @ 7:41pm

Re: Re: Re: Re: Re: Re: This was so expected ...
Well, I said that they're probably not thrilled with having to give up almost have their money to stream something that is infinite. You helpfully pointed out that there are not an infinite number of different songs out there. I, being the trusting sort, assume you would only volunteer this information because it has some bearing on the situation.

Are you saying that Pandora *does* pay for each use of an infinite good? I sure hope not, because that would indicate that you offered up information that had no relevance on the situation (though, I'm sure it wasn't to intentionally cloud the issue!) *and* that Pandora is being overcharged.

I'm looking forward to your clarification. Thanks again! :)
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Anonymous Coward, 15 Feb 2011 @ 8:02pm

Re: Re: Re: Profitable
Probably doing more work than you did to get your law degree.
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Anonymous Coward, 15 Feb 2011 @ 8:08pm

Re: Re: Re: Profitable
EBIT - Earnings Before Interest And Taxes a.k.a. Operating Profit or Operating Income(Which is the Revenues minus expenses before taxes).

Quote:

To calculate EBIT, expenses (e.g., the cost of goods sold, selling and administrative expenses) are subtracted from revenues. Profit is later obtained by subtracting interest and taxes from the result.
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DS, 15 Feb 2011 @ 8:43pm

Re: Re: Re: Re: This was so expected ...
Yep.. music sure is far from infinite. Some poor record exec, err, artist, has to hand write all the ones and zeros that get streamed over the internet. That's a lot of work for one person.
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Michael, 16 Feb 2011 @ 4:09am

Re: Re: Re: Re: This was so expected ...
The problem is the labels have overpriced the music. They believe it is 45% (they probably believe it is more) of the value of the Pandora service. They are pricing themselves out of the market.

I'm sure if Pandora could find enough content that they could stream that was not owned by the record labels, they would be happy to not sign deals with the labels. Unfortunately, most of the content over the past 50 years has been taken from the artists by the labels.

Yes, this content is what the consumers want. However, they clearly want better, more convenient access to it as well. Plastic disks don't meet the consumer need anymore. Pandora helps fill this product gap. Unfortunately, the labels are pricing the music so high that either Pandora cannot keep enough profit to survive, or it needs to charge such a high price that it cannot sell anything at all.

Nobody is saying that the record labels CANNOT do this. It is, however, extremely short-sighted. The labels complain about piracy but overprice music for the services that could best combat it. Without services like this, consumers will not turn to the plastic disk that they don't want. They will turn to piracy - not because they don't want to pay for music, but because they cannot purchase the convenience they desire.

Lots of studies and working businesses (umm...Netflix anyone) have shown that people will pay REASONABLE prices and go to legitimate services when their needs are being met. Hollywood and the record labels just seem to think that killing these services by overpricing their deals will somehow make consumers do what they want. They are wrong - the market tells the business what to do, not the other way around - regardless of the monopoly you control.
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Michael, 16 Feb 2011 @ 4:20am

Re: Let the Content Groups do it on their own.
They have tried, but their attempts have been basic cargo cult and totally miss the point.

That's not all that surprising. They are record labels, not application builders, marketing firms, etc.

It's actually pretty funny. Record labels are middle-men that claim they add value to the artists they support (loosely used) because they can add their expertise in recording and distribution to the art created by the musicians. Then, they completely rule out the idea that a company like Pandora can be a middle-man for them adding the valuable expertise in web development, ad sales, and marketing - they just rule out the idea that another company can add value to their product.

I think they are telling us that the middle-men are totally useless and should be actively routed around.
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Hephaestus (profile), 16 Feb 2011 @ 6:20am

Re: Re: Re: Re: Re: Re: Re: This was so expected ...
"I'm looking forward to your clarification. Thanks again! :)"

Instead of waiting for clarification. Wanna start a CC, and FMA style music service to compete with them. Pandora goes under, we reign supreme :)
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Qritiqal (profile), 16 Feb 2011 @ 6:56am

Re: Re: This was so expected ...
I agree with AC on this one. I think ANYONE using any music in any way for their business should be required BY LAW to give 45% of their revenue to the copyright holders. :-)

I also think that anyone using the music for personal use should give 45% of their GROSS income to the copyright holder.

After all, we should be so lucky to get such a valuable raw material so cheap!
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corey, 16 Feb 2011 @ 10:27am

it is difficult to read so many comments in favor of using art without paying the creator with royalties. Tech writers seem to leave the artist's viewpoint (bias) out of every pandora article, even though Pandora has openly lauded the system because it ensures that ARTISTS (not always the label!!!!!)earn revenue for their intellectual property (music). I repeat: it's not always the label! it depends on the deals the ARTIST signs!

It's not labels vs pandora anymore, that marketing angle was over long ago.

At this point most tech writers are perpetuating the anti-artist/label myths that the music business is dead, as mocked in a recent episode of Portlandia. The industry is burgeoning and these rates ensure a revenue stream for artists. I have trouble reading articles that blatantly leave that portion out of their piece. Fans should know how this works. Stop keeping them in the dark.
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