SEC Told Pandora To Be More Explicit In Its IPO That Its Business Is Likely Unsustainable Due To Crazy Licensing Rates
from the licensing dept
We've been questioning the business model viability of Pandora for a while now. The company had told various press outlets that it was profitable, but when it filed to go public that did not appear to be accurate. The issue isn't so much Pandora, but the ridiculous licensing fees it has to pay. Again, this fit with what we had noticed by doing some quick back of the envelope math. We couldn't figure out how the company could become profitable under its licensing deal in which the record labels get a ridiculously large cut -- especially since many in the recording industry have viewed that deal as too favorable (it was a discount from the rates set by the Copyright Board) and would like to increase the payments when the deal expires.Now it's come out that prior to Pandora's IPO, the SEC asked the company to be more explicit about the fact that its business plan relies on a lobbied agreement, and that under the Copyright Board's rates, the company's business model is unsustainable:
You currently operate under a business plan strongly reliant on lobbied concessions and federal court and federal agency consent decrees and settlements, setting reduced royalty and licensing rates that expire in 2015 and that ordinary rates, not subject to such extraordinary measures, to which you may be subject upon the expiration of these exceptions make your current business plan unsustainable, as discussed in your risk factors on page 15 and 16;Again, the real issue here is the ridiculously high licensing fees, set by a completely out of touch and technically clueless Copyright Board. These are the baseline for any negotiation, and while an agreement was reached to let Pandora (and many others) have lower streaming rates for the time being, it seems unlikely that the recording industry will agree to any lower rates in the future, and will only try to push for higher rates. This is unfortunate, given that Pandora is a cool service and it would be nice if it could survive. And, don't think this only impacts Pandora. Other music streaming services face similar licensing issues as well.
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Filed Under: business models, copyright, licensing, sustainability
Companies: pandora
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Is that it or are there other fees they have to pay? That doesn't sound like much at all to me.
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Greedy bastards!
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So I missed the part where Pandora was whining to anyone about anything. Did you read a different article then I did?
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Wait a minute. This isn't Pandora complaining, this is the SEC pointing out that Pandora's model won't fly because of the rates.
Straw man argument and blaming the victim in less than once sentence. Nice.
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Re: Greedy bastards!
Turns out it's $0.0025, which is 1/4 of a cent, not ˘0.0025, which is 1/400th of a cent.
There is a non-trivial difference.
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If 1 million (10^6) people listen to one song, the fee runs up to $25 (10^6 * $0.000025 = $25).
If the average song runs for 3 minutes, and those million people listen for one hour of music (60/3 = 20 songs per hour), it costs pandora $500 per hour to stay in business (20 * $25 = $500).
Something like that, If I got the math right. Feel free to smack me upside the head if I got it wrong :)
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The other side of the coin is that Pandora need to convince labels that they want to have their music on there, as that is the core of their product. As the fees stand at the moment, for every 1m plays of a track, the maximum a label will get is $25 (in reality, I would guess it's lower than this figure, though I don't really have a clue how the fees get split up). If the fees are lowered, they risk having a bunch of labels pull their content from the service.
This has made me think of this techdirt article which I agree with the sentiment of, but I think can also be applied to this topic.
If You're Arguing That Pandora 'Deserves' Their Business Model To Work, Your Argument Is Wrong
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I don't think that's the argument. I think the argument is that Pandora's business model should work, and the only thing keeping it from working is the unreasonably high license fees being charged. Either because the Copyright Board is greedy (figuring that charging more automatically makes higher profits) or vindictive (pretending to offer licenses but pricing them too high to allow a sustainable business model, thus shutting down any businesses they don't like).
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What is the number of people that pandora sends to stores?
Do they have to pay for that work really?
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I'm not sure if they are charging monthly fees but even if they plan something like this, why would I pay for a small selection? Being hostage of MAFIAA's wills they have trouble making a decent range of content available.
I do think the service has future. But when you add MAFIAA to the mix suddenly the future looks much darker. Much like Netflix, MAFIAA won't allow those to grow and thrive. As it was well said recently, MAFIAA seems to be getting close to 1997 now. In my opinion they never left the Edison era.
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In Q1 2011, license fees at Pandora were $29.2 million
If that figures consistant every quarter, that's $116,800,000 a year. In licensing fees. From 1 company.
Even to the mafiaa lords, thats a figure to drool over.
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pandora pulled out of the UK saying the PRS wanted too much from them.
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The real problem is...
The music labels should see it for what it is, radio, and be paying for the promotion of their music. Yea, I know that is illegal, but the point is that licensing should be extremely cheap or free.
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Re: The real problem is...
When have the music people ever cared about what others think of their horrid extortion practices?
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Re: The real problem is...
You think Pandora should have an annual turnover of something like $200m but they shouldn't have to pay anything for the content that makes their product good?
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Now should I be allowed to buy 1 movie, copy it a million times and sell it? No, but should I be able to play it over the net to other? Sure, why not?
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Remember, the whole copyright system was developed to promote creativity... not create a welfare system for artists so that they never have to work again. If they can coast on the residuals of a song written 50 years ago, where's the incentive to create new art?
Now I, and the person to whom you were replying, don't think that everyone should get these things for free. But if you are making MILLIONS off of a handful of songs because you are charging per person who ever hears it, how is that using the CW system to 'recoup the cost' of creating the and distributing the art? That's extortion.
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Just to mention your point about a a small, laughable trickle comes down to the actual artists - I think you may be making the mistake of confusing the music industry with the major labels (something I read all the time on techdirt)
Pandora pays their licence fees to soundexchange, who don't make a profit and pass those fees directly on to the labels. In the case of the majors, that may be through the RIAA. In the case of independent labels, it is given directly to them.
It's not uncommon for small indies to do 50:50 splits with their artists and it's also not uncommon for labels to pass the entire rights of recordings back to artists after a set time. The industry is not full of wankers. It's really not.
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And thank you for the perspective on the other facets of the industry. I know that I let my "RIAA Screwing The Artist" view cloud my perception of the rest of the labels that don't do that... I get a bit hung up on the "for the artists!" battlecry of the RIAA. Irks me.
Anyway, Even if that money does go back to the artist, how is that helping encourage the creation of new art? How is it paying back the cost of creation if they are getting ridiculous sums of money for something they did long ago? If that's the kind of business model that our society wants for artists, then fine... but I don't think it is. If it were, we'd all be in line to pay the Artist Welfare instead of here arguing about how much is being charged because there is no alternative available (unless we force a change).
And maybe that's part of the problem too... we don't have a choice (outside of piracy)... it's either play their way and fund the welfare... or don't listen to music.
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In my opinion, an artist being paid more if their music is popular is a nice (and somehow fair) concept. I would agree wholeheartedly that the 50 year term is ridiculous and should be shortened and sampling should be sorted out and all sorts of other issues, but I don't think the fundamental idea of paying for a piece of music, or paying a licence to broadcast a piece of music is flawed (and certainly not to the point of calling it "welfare"!)
I also don't agree that there are many artists getting "ridiculous sums of money for something they did long ago". Nobody's making great money from sales, and even fewer are making any significant amounts from streaming (but it's getting better).
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You're right... that list is restricted to the ones who sue and who lobby for extensions to copyright to the point that we get into the 50+ year timeline. And all for no reason other than the sense of entitlement that they should always get paid for anything they ever do. And I disagree with that... that's welfare.
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A system where royalties are paid on sales of tracks can lower the cost of bringing new music to market. It means that a label can release a record relatively inexpensively in the hope that it will one day become profitable. In the absence of such a system, a band would want to be compensated up front for the time that they have worked on the album, knowing that is the only payment they will receive.
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And why should this industry be so protected? When you talk about creating at a reduced cost in the hopes that it becomes profitable... that's the risk of business. I don't see the Mom & Pop sandwich shop down the street from me being given such a wonderful guarantee of ROI.
Seems rather shady that this one industry is so well-favored by the government (thru laws) that it's damn near guaranteed to succeed. If only we were all so lucky.
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Pandora's 'product' isn't the music itself either, it's the discovery engine. If I already know what song I want to listen to Pandora is not where I would go looking for it because their service doesn't work that way. It actively encourages people to find new songs to buy. That could be a win for everyone, consumers, Pandora, and labels.
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> The music labels should see [Pandora] for what it is
It's a way to increase audience enjoyment by valuing the content more. Paying more makes listeners value the content more. The more they value the content, the less they'll pirate. Ergo, the way to fight piracy is to charge unbelievably high prices -- as they are doing to Pandora. Problem solved. Everyone happy.
> The real problem is Pandora is effectively radio,
> something people have gotten free for decades.
And therein lies the problem: Freetards expecting radio for free. Letting other people overhear radio for free. The obvious (and therefore patented) way to solve these problems is to put radio behind a paywall which will greatly increase the number of listeners.
(I think I need to take a shower now. :-) )
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Music
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http://soundexchange.com/service-provider/rate-tables/commercial/alternative-rate-structure s/pureplaysmall-pureplay-rates/
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Like Netflix, like Hulu, etc, once Pandora is really successful, which direction do you think the price will go and how fast?
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2011 - non-subscription: $0.00102 subscription: $0.00170
2012 - non-subscription: $0.00110 subscription: $0.00200
2013 - non-subscription: $0.00120 subscription: $0.00220
2014 - non-subscription: $0.00130 subscription: $0.00230
2015 - non-subscription: $0.00140 subscription: $0.00250
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For the record: $0.0025 is ˘0.25, which is 1/4 of a cent. That's 100 times as much as ˘0.0025, which is what was quoted before.
Funny how many people see $0.25 and say "twenty-five cents" but shift it right and they get confused: $0.0025 is "point oh oh two five cents". Only it isn't. And some guy goes to Europe or Asia or something and pays 100 times as much for his cell phone data connectivity as the customer service drone quoted and who gets to eat the difference? Not the phone company.
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"The issue isn't so much Pandora..."
Yot! You're slowly learning economics, Mike. The basic problem with any business IS those darn COSTS for mere PRODUCT. That's your consistent position (here in music website version): the MAIN draw must be provided by someone else FOR FREE. "John Doe" says explicitly that licensing should be FREE.
The notion seems to be that content owners should be happy that their product is being "promoted" and that they can somehow make money off selling the "real" product. -- BUT you never seem to factor in "piracy", which if unchecked, WILL lead to near zero sales. Then, having undercut all possible means of their income, you take off saying content owners are urging draconian copyright.
You seem stuck in a rut, and as I've argued before, I don't see any way that the /system/ can be made to work: ad rates are too low to pay licensing, and licensing is irrelevant in the face of rampant piracy.
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Yet another person who didn't read the cheap part... do you stop reading as soon as you see the word "Free" so you can jump down to the Submit Comments section?
Wrong. We have seen many studies that show where pirates make the best customers and that they DO in fact purchase music. We have heard from many self-proclaimed pirates here that say they do buy the music the previously 'pirated' so that they can indeed support the artists.
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Re: "The issue isn't so much Pandora..."
If even the SEC is saying the environment is untenable for business to run safely...
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Re: Re: "The issue isn't so much Pandora..."
What the SEC is saying is something they might say to any subsidized business: When the subsidies or price breaks on your raw material expire, and you have to start paying the true costs, it will adversely effect your business. You need to disclose it.
The SEC is not in any way commenting on the validity of licensing fees, or drawing any conclusion about them. They are only asking Pandora to be more clear in explaining to potential investors what their current situation is, and that a material change is forecast in the future, when the special pricing expires.
Basic business models 101: If the cost of your raw material is too high, you go broke. If you don't like the cost of the material, then source it somewhere else. If there is nowhere else, or the source isn't as good, you can either choose to put out an inferior product, charge more for your product, or close the doors. The SEC is just assuing that Pandora discloses this clearly important "restriction" on their business so that investors aren't tricked into buying something that likely won't be profitable when the major discounts come off.
The SEC is not saying "the environment is untenable for business". That is BS and you know it.
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So what part of that ISN'T saying "the rates are too high for your business model"?
Now, you could argue that Pandora should adjust thier business model to fit with the fee schedule and just poo to them if they can't find a way to make it work. But if the fans want such a service, and you're in the way of it... how are you helping the creative innovation wanted by your customers?
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Piracy is essentially unchecked, and media (music, movies, games) are selling better than they ever have.
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What does radio pay?
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It's all promotion - just like radio is all promotion - and it's appalling that Pandora has to pay the labels to promote the labels. The RIAA has no business complaining about piracy when they're charging people to promote their music, and pricing streaming services out of business - services which will reduce piracy greatly.
I guess the big labels don't like it because it might lead someone to buy music from an indie label. In my opinion, they can't file bankruptcy fast enough so the world can move on to something better.
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Clarification
>>>Pandora should keep complaining to journalists that the rates are set too high.
I was not referring to the above article - obviously, I thought - but rather making a general statement. I find that Pandora complains about what is essentially its cost of goods. And I pointed out that it could also raise its revenue in one of several ways.
FYI, since several people asked, Pandora pays royalties to performers and labels, and to songwriters. In the U.S. traditional radio only pays royalties to songwriters.
The other difference between Pandora and traditional radio is that Pandora has WAY fewer commercials. Perhaps it should run more. That's really my points - the SEC is pointing out that Pandora doesn't seem to be on track to make a profit, because its revenue isn't high enough relative to its cost of goods. Mike blames this on the cost of goods being too high. But you could just as easily say that revenue is too low.
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Pandora's Copyright woes
When Live365 started letting people make little radio stations, the cool part was playing/promoting artists/genres you liked, maybe even sneak tracks to bands your affiliated with onto the show. I felt the button on the player allowing the user to buy any of the tracks played, where I, the DJ make nothing, was good payback to the labels for promoting their music. Can't do that with radio easily, well now with Shazam you can, but when labels ask Internet broadcasters to pay per listener to promote their artists for free seems ridiculous too. The more popular stations, songs or artist would make more sell throughs.
If the labels want to get paid at the rates requested the services should pull the sell button and promotional/artist info part (the true value add).
Pandora and all the Internet broadcasters are being forced to pay to provide promotion and sales for the labels.
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