Viewpoint: "Pandora Business Model is Suicide Pact"
by Ed Ryan
You'd be hard-pressed to find too many people not on the Pandora bandwagon these days. The music service is all the rage on Wall Street as every Tom, Dick and Harry investor hangs on every word written in every SEC filing just waiting to dump their money. Bloggers, even former radio people, write about how great Pandora is and how not-so-great Radio is. Even at Radio Ink's Convergence, we stopped counting how many times the word Pandora was used, most of the time it followed a giddy adjective. The only guy stepping out on a limb is Bob Pittman who called Pandora nothing more than a playlist on shuffle. Well, we found someone else. You need to hear how he lays out the numbers on the Pandora Phenomenon.
Jim Edwards is a former managing editor of Adweek. He's also covered marketing at Brandweek for four years and is a former Knight-Bagehot fellow at Columbia University's business and journalism schools. He now works at BNET, a division of CBS Interactive. Edwards recently penned a piece entitled "Pandora's Business Model Looks Like A Suicide Pact." He believes Pandora is just a hobby, not a business. A headline like that deserves some explaining. After all 98% of the people with a pulse see Pandora in a completely different light. So we got in touch with Edwards and asked him for some details.
RI: You are one of about 5 people who are not on the Pandora bandwagon. How is that?
I love Pandora. I just don't see how it can become profitable.
RI: Suicide is a very strong word?
Pandora's damages are self-inflicted. It might die. You figure it out.
RI: You've done the math with very impressive graphs detailing how this is not going to work. Can you talk about your data?
Pandora's expenses (music license fees) are directly related to its revenues (the ads it sells against people listening to those songs) and those expenses are greater than its revenues. Further, if someone subscribes to Pandora they get the service without ads, so ad revenue and subs revenue constantly cannibalize one another. Lastly, its music fees are set to rise through 2015. The company has yet to describe how it believes it will become profitable. Right now, Pandora is someone's interesting hobby. It's not a business. I've looked at Pandora four different ways (see chart), and it never comes out in the black.
RI: The "set" annual increase in music fees expires in 2015. One could argue that those receiving the money from Pandora would not want to lose this massive revenue dump and will come up with some sort of sustaining agreement. What are your thoughts on that?
The music business will have to do some hard thinking about whether it wants Pandora to survive. Sirius XM profits quite nicely on the same licensing scheme that Pandora is subject to. The music business may choose just to live without Pandora, or it may lower its fees and allow Pandora to live. It's hard to see Pandora getting a "special" deal that no one else gets simply because we all like Pandora.
Alternatively, Pandora may have changed its business model by then and found a way to make a profit. At which point, the music business might want to lock in its fee level for the next period. It's free money, after all, and the more services that can make money playing it the more money artists and labels will get. They should consider lowering the fees, frankly. But I suspect the music business will see Sirius' and Pandora's profits (if there are any) and try to kill the goose.
How long do you think Pandora lasts?
No clue. When it makes its IPO that will inject some cash. It may get loans or float some debt. It may place private sales of new stock. There are endless ways for nonprofitable businesses to raise new money.
What is the formula they need to succeed?
They need to charge advertisers more per listener. Or they need to run ads more frequently. Or they need to make the "Are you still listening?" button pop up more frequently. Or they need to raise subscription rates. Or they need to take a greater cut of any music sales generated by clickthroughs from Pandora. Or perhaps they should do product placement and take payola from music labels to play certain songs in appropriate channels more often. It's legal if it's disclosed.
Why do you believe there is so much support from people, even people with money, for a business model that never has seemed to prove it can make a profit?
Because Pandora is really awesome to listen to. For listeners it works really, really well. You get the music you want with no annoying DJ. You get all the info you need about the songs -- far more than a DJ will give you. Your readers should check outBeep-Thump Express, my techno channel on Pandora.
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