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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    PaulT (profile), Jun 14th, 2011 @ 1:36am

    "There is a fundamental problem with Pandora Media's business model"

    ...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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      mike allen (profile), Jun 14th, 2011 @ 2:17am

      Re:

      I agree Pandora was a good service but as i don't live in the USA cant get it not without going through a proxie. But the cost of licenses is very much against them the labels really wanted to kill it, and all internet radio.

       

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        PaulT (profile), Jun 14th, 2011 @ 2:48am

        Re: Re:

        Yeah, it's a good thing everyone who was listening to internet radio and using Pandora outside of the US suddenly just started using "approved" services and buying CDs the way the labels wanted us to!

        Wait... that's the fictional reality the labels are living in. Here in the real world, they simply lost money ;)

         

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    Anonymous Coward, Jun 14th, 2011 @ 3:24am

    As Pandora Goes Public, How Come No One Is Pointing Out That It Misled The Press About Being Profitable?

    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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    Bruce Houghton, Jun 14th, 2011 @ 3:24am

    Pandora - Hypebot

    I'm always happy to see a link to Hypebot.com in one of the few other "generally good publications that don't get easily tricked". Thank-you, Mike.

    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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    John Doe, Jun 14th, 2011 @ 4:17am

    If you aren't part of the solution you are part of the problem

    Apparently I am part of the problem because I am streaming them right now. I don't pay for service though. But I don't pay for OTA radio either and nobody complained. In fact, they use to illegally pay radio stations to get their music on the air. Hmmm, I feel like their is a solution here somewhere.

     

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      Anonymous Coward, Jun 14th, 2011 @ 6:48am

      Re: If you aren't part of the solution you are part of the problem

      used to? payolla is the worst kept secret in the industry, and it is still happening today.

       

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    Kingster (profile), Jun 14th, 2011 @ 5:47am

    Am I a sucker?

    Maybe. I actually pay for the "One" service. It gets me a little bit of stuff - like the Adobe Air Desktop Player, no commercials, more skips an hour, higher bitrates, etc. Not too bad, really. And I'll agree with the rest of you - I love the fact that it gets me started on new musicians.

    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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      greg42, Jun 14th, 2011 @ 9:12am

      Re: Am I a sucker?

      You're a sucker to keep paying for Sirius. I dropped that last year after I figured out that I don't really need it that much (especially for music, it sucks), and paid for Pandora One. The only time I miss Sirius is when I'm REALLY in the sticks in the car, like when I went out to the Grand Canyon north rim last fall. Otherwise Pandora, and other sources of material I can stream on my iPhone, is enough. If I actually bothered to load my iPhone with some non-streaming content, I probably wouldn't miss Sirius at all.

      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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    johnjac (profile), Jun 14th, 2011 @ 5:49am

    Don't worry

    Don't worry folks, if Pandora fails, it will be because we are "promoting the progress".

     

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    chuck, Jun 14th, 2011 @ 6:02am

    which is why it's unfortunate that no one seems to have challenged Pandora on its claims.
    I think you just did that...

     

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    Allen (profile), Jun 14th, 2011 @ 6:29am

    What are you talking about? They disclosed it all right there in the name of the company.

     

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    Anonymous Coward, Jun 14th, 2011 @ 8:11am

    With all of the coverage the IPO has been getting in the press lately, you'd expect to see more journalists at least attempting to contact SoundExchange or the Copyright Royalty Board to ask some probing questions about those royalty rates. Even if all that comes of it is a 'declined to comment', it would at least be putting the spotlight on that particular issue where it really belongs.

     

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    jakerome (profile), Jun 14th, 2011 @ 8:15am

    Techcrucnh

    I take exception with the claim that Techcrucnh is a "generally good publication that doesn't get easily tricked."

     

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    Adam, Jun 14th, 2011 @ 8:25am

    Profitability

    I think everyone's missing a key fact -- Pandora is probably very profitable for the copyright holders; at least for a little while until they kill Pandora.

     

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    Anonymous Coward, Jun 14th, 2011 @ 9:02am

    When I saw that the service has an artificial limitation on number of "skips" I passed on it, and will never use it. What a silly licensing restriction!

     

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      PRMan, Jun 14th, 2011 @ 9:19am

      Re:

      Just hit F5 and you can have unlimited skips. Shh, don't tell the record industry.

       

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        Casey, Jun 14th, 2011 @ 9:40am

        Re: Re:

        Actually you can have unlimited skips, all you have to do is delete files saved on your computer or using private browsing. You can have unlimited hours, daily skips, and have it be ad free by using their Windows Gadget.

         

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    Casey, Jun 14th, 2011 @ 9:13am

    Increased royalties

    It seems most people forget that Pandora's royalty rates are also increasing every year, and the music industry has admitted to wanting to raise the "pureplay" royalty rates drastically once the agreement runs out (in 2015?)

    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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      GoPandora, Jun 14th, 2011 @ 1:36pm

      Re: Increased royalties

      2015 is a long way from today........

      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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    Aaron Martin-Colby (profile), Jun 14th, 2011 @ 10:20am

    Yay!

    Not "yay" in that I'm glad that they're losing money.

    "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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    Bill (profile), Jun 14th, 2011 @ 10:31am

    I've subscribed to their service for almost 2 years now. Well worth the yearly fee. Too bad they will be pushed out of business by the recording labels.

     

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    Anonymous Coward, Jun 14th, 2011 @ 11:22am

    The royalty rate issue is one that affects all Internet radio broadcasters. Some of you may not much care for Pandora, but if you're a fan of any other Internet radio programming (not just those currently available but any others that innovators might potentially come up with) then this is a problem for you.

    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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      jr565, Jun 25th, 2012 @ 12:10pm

      Re:

      A golden egg eh? They looked into how much an artist like Lady Gaga earned after her songs were played a million or so times on Spotify. The amount? $32 bucks. That there is some golden egg. Now take an indie band who is lucky to get 10,000 hits. What is that like 3 dollars?
      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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        jr565, Jun 25th, 2012 @ 12:28pm

        Re: Re:

        My mistake. She made 167 bucks for 100000 listens of Poker face on Spotify. A platinum artist, with a million hits. And she earns 167 bucks!
        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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    steer, Jun 14th, 2011 @ 12:11pm

    contrary view

    I think Pandora pays way too little for the rights to the music it performs. First of all, it pays songwriters next to nothing for the rights to perform their musical compositions, which are incorporated in every sound recording Pandora plays. The last numbers I saw indicated Pandora had paid songwriters $5 million total since it went online, or literally 1/10th of what it had paid to recording artists and labels to perform their sound recordings. Pandora has no "promotional" value for songwriters - they don't tour or perform - rather, performance royalties by services like Pandora IS their livelihood. And if the biggest Internet radio service, with almost 1/2 of the entire Internet radio marketshare, has only paid $5 million total to ALL songwriters for the performance of ALL their music since Pandora went online, Internet radio is a terrible deal for songwriters.

    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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      PaulT (profile), Jun 15th, 2011 @ 8:40am

      Re: contrary view

      Like many in the music industry, you seem to confused a few issues IMHO.

      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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        steer, Jun 15th, 2011 @ 2:59pm

        Re: Re: contrary view

        A few reactions.

        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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    vastrightwing, Jun 14th, 2011 @ 2:51pm

    Re: Contrary view

    Whine much? Come on. Why can't I get paid for stuff I did in the past? Come on! It's fair. If I do something once, why shouldn't I get paid for it over and over? After all, my employer benefits. If I build a house and only get paid $200K, people live in it for years free! If I cook a meal for a customer and only get paid once, how will I survive? You're asking me to cook forever? I agree. Song writers and musicians should not tolerate having people pay only once for a performance. Going forward, when you go to a concert, you should pay for that show every month. I think 5% of the purchase price is fair. And if you buy a ticket from a scalper who charges $500, you should be obligated to pay 5% of the scalped price since it's obviously worth more to you. Recorded music should be licensed and you should be forced to pay for each time you play the music. Furthermore, you need to be obligated to pay for each person who can possibly hear the music. Otherwise, it just isn't fair and artists will starve. I propose to manage said monitoring. I will be fair and make sure each artist gets their fair share. I promise! Really. I'm not like the others.

     

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