As Pandora Goes Public, How Come No One Is Pointing Out That It Misled The Press About Being Profitable?
from the the-misleading-state-of-startups dept
We mentioned this earlier, but with Pandora scheduled to go public this week, it seems to bear repeating. Over the last couple of years, Pandora, which is a service that I'm a fan of, has repeatedly told the press that it is profitable. You can see various reports on its profitability from TechCrunch, Mashable, Hypebot and News.com -- all generally good publications that don't get easily tricked. Yet, when the company filed to go public, it became clear that it wasn't profitable. Not only that, but it wasn't close to profitable and might never be profitable.This really shouldn't be a surprise. If you knew anything about typical ad rates and the costs associated with (a) streaming bandwidth and (b) the licensing details for streaming music, the math really didn't add up. And it's just now, on the eve of what is likely to be a very successful IPO, that more people are realizing that the company is basically a money losing machine, and that its revenue doesn't cover its basic expenses:
There is a fundamental problem with Pandora Media's business model: the more its product is used, the more money it loses. That's the opposite of what makes a company viable in the long term. Nevertheless, the online music service is asking public shareholders to finance its growth so it can draw more listeners, increase usage and ... lose more money, presumably.This is unfortunate on multiple levels. The biggest issue here is, not surprisingly, the ridiculously high costs of the licenses that Pandora has to pay. Even though plenty of folks have found that Pandora is an excellent source to discover new music, and has turned many people (myself included) on to new artists we'd never have heard of otherwise, the recording industry still demanded ridiculously high royalty rates, which it eventually extracted from Pandora. Oddly, at the time of the agreement, Pandora cheered on the deal saying that the rates made sense (and then used the deal to raise a lot more money). But with the details showing that the costs are keeping the site unprofitable, and may fundamentally make it so that the site can't be profitable, shouldn't we be questioning how reasonable those rates are? And, while we're at it, can we question the earlier claims of profitability from the company to the press? Lots of private startups make this sort of claim to the press, and they never seem to get called on it, which is why it's unfortunate that no one seems to have challenged Pandora on its claims.
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Filed Under: music, profitability, streaming
Companies: pandora
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...it depends on labels licensing its content where they choose and not where their customers are. Which means it lost a potential audience of about 6 billion people when said labels decided it couldn't stream content outside the US, losing users like myself who used to use it (and presumable gain it revenue) all the time.
Yeah, the costs of the licences are also a major problem, but not the only one the morons at the labels caused.
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Wait... that's the fictional reality the labels are living in. Here in the real world, they simply lost money ;)
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Because they feel duped and betrayed?
Because they want to make back their seed money?
Because they want to cash in on the IPO?
Because they are dishonest Bastards?
Shall I go on?
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Pandora - Hypebot
But I need to point out that while you linked to our January 2010 story touting Pandora'a potential, I've since also covered the "more listeners mean higher costs" issue for some time. Just this month, we wrote: "But with more listeners comes more music streaming costs, and that led to a $6.8 million, Q1 loss up 126%." in a story on the IPO filing (http://www.hypebot.com/hypebot/2011/06/pandora-ipo-to-value-company-at-1-billion.html); and again last week when analyst Rich Greenfield of BTIG began encouraging investors to stay way from the offering (http://www.hypebot.com/hypebot/2011/06/analyst-says-dont-touch-pandora-ipo.html).
I read and rely on your insights daily, but you're not the only one who sees Pandora's shortcomings. Even the WSJ wrote last week: "The more people listen to Pandora and the more money Pandora makes, the more those costs will grow, putting pressure on the company to sell a boat load more ads than it does now."
What we all need to cover more is a royalty structure that could put a popular outlet that encourages music discovery like Pandora out of business.
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If you aren't part of the solution you are part of the problem
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Am I a sucker?
That said... I pay ~$150/year for my Sirius, and I'm in my car far less than I am in front of a computer, or some other "connected" device. In fact, while I could pay a bit *more* for my Sirius (but less than the cost of Pandora|One) and get streaming from them - there's a huge difference... I can't get rid of the "crap" on Sirius. And there isn't that much that they introduce me to since it's pretty mainstream.
As John Doe states... "In fact, [the music companies] use to illegally pay radio stations to get their music on the air. Hmmm, I feel like their is a solution here somewhere." If the companies really gave a rat's ass about selling, and putting money in their artists' pockets... They would greatly decrease their prices for emerging artist streams, etc.
One of the interesting things I note is that some of the tunes I see on Pandora came from a compilation disc... I wonder if the recording industry has screwed the pooch on some of their compilation licensing, allowing the music on a comp disc to be "sub-licensed" more cheaply...
As to Pandora operating at a loss? Meh. It doesn't surprise me - as you point out, streaming costs and asinine licenses don't allow it to operate much differently. BUT... If it "gets bigger"... Will it gain some deal-making capacity? Kinda like Apple - can they get big enough that they can force the labels to their will?
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Don't worry
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I think you just did that...
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Re: If you aren't part of the solution you are part of the problem
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Techcrucnh
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Profitability
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Re: Am I a sucker?
I hope there's something more to Pandora's eventual model though, because it won't be much good if they IPO and then just flame out after never making any money.
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Increased royalties
Also look at the amount of staff Pandora has and you will see why they lose money. Pandora does not know how to manage their money. Unless I am mistaken, Pandora is still driving their found Tim around the USA, wasting cash. Pandora no longer needs to be promoted, nor does it even remotely listen to the suggestions they get on this national tour.
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Yay!
"Yay" in that I feel vindicated. I HATE Pandora and could never believe that it was somehow a big deal. Add to that my confusion over how a service like this could ever make money, and how the hell this service could be possible what with the music industry being helmed by complete retards, and you can understand my consternation.
Essentially, I felt angry that people cared about it.
So, yeah.
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The recording industry is either stupid enough to kill the goose that lays the golden eggs, or they are deliberately trying to kill Internet radio.
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contrary view
Second, Pandora doesn't pay a market rate for the rights to either the songwriters' musical compositions or the recording artist's sound recordings. However, it pays market rates for broadband access, servers, furniture, employees, rent, and all its other cost inputs. Why shouldn't it have to pay market rate for its most important input: the actual music around which its service revolves?
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Re: Pandora - Hypebot
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Re: Increased royalties
Worry is wasted. Pray you can get in for the intial offering.
All the blogs/info highways are an awsome free form of advertisement :)!
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Re: Contrary view
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Re: Profitability
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Re: contrary view
First of all you claim that Pandora's most important factor is the content. It's not. The most important part of its service are the music genome project and its user interface. True, it wouldn't be anywhere without the content it provides, but the only reason people use the service in the first place is due to the value it delivers, not the value of the content alone. Its value comes from ease of access and music discovery as much as the ability to listen to your content.
Secondly, what's the "market rate" for music licensing? This has increased significantly over recent years with the changes in licensing structures aimed solely at internet rather than physical radio stations. If this structure is still unfair in your eyes, this is not Pandora's issue as they are paying the market rates demanded of them by the labels. But, increasing this will not increase revenue for the labels - and if Pandora is destroyed, those revenues will absolutely decrease.
Finally, your attitude is fairly typical of people thinking of only one side of the equation. You're assuming that Pandora are only affecting one part of the market (direct royalty payments for their plays). But, they act primarily as a music discovery service - how many albums, concert ticket and other merchandise gets sold as a direct result of Pandora exposure? You concentrate on songwriters not getting paid directly from Pandora, but don't they also get paid when their songs are purchased or covered by other musicians, etc.? If their songs are more successful don't they get hired to write future hits or write for other media (movies, games, etc.)? There's more than one avenue here...
Your energies would be best spent asking the labels why songwriters are being screwed (not least by Pandora only being allowed to service a small fraction of their potential audience rather than trying to demand more money from its existing audience.
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1) I don't think you understand the distinction between songwriters, on the one hand, and recording artists, on the other. Many songwriters are NOT recording artists. Thus, they don't have a business relationship with the labels, don't tour, don't sell concert tickets or merchandise, and only get pennies for songs that are included in albums. Beside composers for movies and TV shows, songwriters also DON'T create on commission...rather, they write based on inspiration and then hope to convince performers to record their works. Their livelihood has largely depended, for almost a century, on the performance royalties they receive when their songs are publicly performed by commercial entities like cable TV providers, radio stations, and concert venues. If the Internet is the future of music enjoyment, then Internet music performances will supplant these traditional sources of performance royalties that sustain songwriters. If Internet services don't replace performance royalties while they supplant traditional sources of such royalties, songwriters will become hobbyists, rather than professionals. That doesn't benefit any of us. Why shouldn't Internet services, like Pandora, ask their users to pay enough to sustain the music creation on which they depend?
2) Pandora does NOT pay a market rate to the labels. Pandora operates under the Section 114 statutory license that COMPELS the labels to license Pandora at a government-set rate. This is the exact opposite of a market rate. The government sets the rate, and Pandora still complains that the rate is too high.
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From an artist perspective, they aren't getting much from you listening to their stuff on Pandora/Spotify unless you then go out and buy their CD. Only why would you buy it if you can listen to it on Spotify or download it for free. THere is no golden egg, except for the owners File sharing sites, and Google and companies like Amazon/ITunes. Those who make the content - screwed.
It may be a golden egg for you, since after all you get all the music you want for free, but don't pretend that your free ranging is some money stream for artists. It's not.
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For all the people saying "yeah, but she will get this huge fan base who will then rush out and buy her albums." Well maybe, or maybe people will listen to her on Pandora and forgo buying her music directly, since after all a digital file is a digital file.And why do you need to own it if you can listen to it for free?
In which case, exposure on Spotify could lead to an excessive loss in royalties for artists. Since many fans assume or dont care that their listening does not in fact do much for artists at all (unless you think 167 bucks for a million listens is big bucks). Its the creation of a market that in fact dilutes the an artists royalties not enhances it. Someone may be getting rich off of Spotify, but it sure as hell isn't the musicians.
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