Pandora Sings the U.S. Blues

by Mike Wendy on December 11, 2012

“At Pandora, each sale drives up its losses,” says a B-section lede from last Thursday’s Wall Street Journal.   If you don’t already know it, Pandora is an immensely popular web-based music service that is either free with intermittent ads, or aired without ads via subscription.  For many (me included), it has replaced radio for musical entertainment.

But, popularity can be costly.

Because more and more people are accessing Pandora in mobile settings as opposed to simply desktops, advertisers are paying less.  Yet, with each song played – with 60 million users hearing about 3.6 billion hours of music – Pandora has to pay record companies and music publishers.  And in this quarter, that’s cost them about $66 million, or 55% of the company’s revenues.

This ain’t juke box change.  Each “listen” – which is governed by a government-sanctioned agreement between online radio companies and record labels – costs about 0.11 cents, going up to 0.14 cents in 2015.  To date, ad revenues haven’t been able to keep up with the company’s popularity, which has cut mightly into profits. With music costs going up, the future might prove even less profitable than now for the company.

So, what does any company do when it needs help in our economy?

Call Uncle Sam, of course.

Not surprisingly, the Journal reports that:

Pandora has aggressively lobbied Congress for a law that would significantly cut those royalties.  The Internet Radio Fairness Act (IRFA), as the proposed legislation is known, may be the company’s only chance at robust profits says [industry analyst], Tony Evans.

“From a strategy perspective it’s the best single thing they could do for their business,” he says. “Without that, if they run their business perfectly, they are a low-margin business.”

Really?  The best strategy perspective?  How about understanding the mobile market a little better, and beefing up the sales staff to sell more ads?   That seems like a better way of leavening one’s bread in a difficult market – one which the company freely entered into and knew the risks in the first place.

Instead, they want a bailout.

According to corporate-funded, “consumer advocates,” Public Knowledge (which supports the IRFA):

The Internet Radio Fairness Act is a bill that has been introduced to both the Senate and Congress. It works to achieve parity and sustainability in the online radio marketplace by changing the standard by which online radio royalties are set to the same factors used for cable and satellite radio. The current standard has led to royalty rates that often amount to more than half of the service’s revenues, in a field where no major online radio company has ever earned a profit…

…The Internet Radio Fairness Act takes important steps towards establishing reasonable online radio royalties, but parity is required among radio platforms to achieve true fairness. IRFA would establish a workable ratemaking standard that could lead to reasonable royalty rates for online radio. Under the current standard, online radio services have paid rates so high that no major service has yet earned a profit, which discourages investment and innovation in the business.

Ya’ gotta’ love PK’s cries for parity, sustainability, fairness and profits.  These are entitlements, you know – that is, for the Internet’s “edge providers” like Pandora (or Google, Facebook, Twitter, etc.), but not anyone else (like AT&T or Verizon).

Don’t get me wrong.  I love Pandora.  Really.  I use it almost every day, for hours.  It has truly changed how I listen to, and enjoy, music.

Moreover, guys like Pandora founder, Tim Westergren (pictured below), pay artists instead of stealing from them.  This is important, especially in an Internet culture that thinks (wrongly, sadly) that everything either comes for free, or must be made to be free.

Tim Westergren, founder of Pandora

But, excuse me for offering this bit of free advice.  Companies that willfully chose to enter markets which rely on government grants or policy to survive seem, well, none-too-smart.

Uncle Sam doesn’t do a lot very well.  So, to rely on him with one of your most important business inputs – e.g., music, which must be paid for via a government-set music royalty in order for your company to remain both legal and viable – isn’t good “strategy.”  Rather, it’s just short of madness.  Pandora’s business model – at least the current version of it – has a baked-in roadblock to “robust profits” because it depends upon U.S. politicians and policymakers (who are no slouches when it comes to recognizing opportunities to “help out”) to “correct” that royalty – something the company cannot practically accomplish on its own

At a higher level, perhaps this is emblematic of a bigger problem that we have allowed Washington to create and then exploit.  As we get our bungee jumping cords on in preparation for jumping off the so-called fiscal cliff, we hear business lobbying groups strenuously urge Uncle Sam to help us avoid that sure calamity.  I don’t mean to belittle the apparent seriousness of the situation, but maybe if those same businesses didn’t have so much involvement with, or need from, the government – if government were in fact limited and its interests not so engorged and intertwined with its own “output” as well as that of the private sector’s – we wouldn’t have a fiscal cliff in the first place.

But I digress.

Back to Pandora.  As I said, I like the company.  What I don’t like, however, is the faux crisis, pushed by faux public interest groups for faux reasons.  Pandora’s choices have caught them up, pure and simple. But, instead of dealing with it privately, they’re gunning for Uncle Sam’s public support (which only further perverts the “marketplace”).

More and more, we see this childish habit in the Internet industry.  More and more, we see that the so-called new and improved way of doing business – i.e., of peddling 0′s and 1′s in Silicon Valley – is really not much different than doing business in any other part of our economy.  When a good product hits, it brings success.  A great amount of it.  But then that success soon demands protection (because the fundamental inputs were themselves flawed, necessitating “fixing”).

Ironically enough, those “Internet-changes-everything-businesses” soon find themselves in Uncle Sam’s “protecting” embrace – a presence they once scorned for being so perpetually behind the times, but on whom they now depend because they believe his sclerotic policy apparatus can choose the “right” winners and losers.

Pandora thinks that it can appeal to Uncle Sam’s better angels and end up being a “winner.”  That is “strategy” which is not only failing our economy, it will likely fail Pandora, too.

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