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
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.