WSJ reported last week that Pandora is a classic case of the old adage: "We lose money on every transaction but we make it up on volume." Pandora must pay record companies and artists $0.0011 every time a listener hears a song. With 59.2m users these costs rose to $65.7m in the third quarter of this year. Pandora depends on ad revenue to make its business model work, but there are fewer advertising opportunities on mobile devices than laptops and desktops. Hence, as more Pandora customers shift their listening to iPhones and iPads, Pandora gets squeezed. Its stock dropped 18% in one day last week.
Pandora's response: one would think it might raise its ad rates or start charging users on mobile devices. But no! Instead we have them (along with other internet music operations) trying to push the Internet Radio Fairness Act (IRFA) through Congress before it adjourns. Currently the rates paid by Pandora and other internet-based music providers are set by the Copyright Royalty Board. The board has set higher rates for Pandora than for satellite or cable radio. Pandora screams foul, but in actuality the rates seem to reflect historical circumstance more than anything else. Cable radio and Sirius have been around longer and they received a better deal when they entered the market. To make things even more confusing, traditional over-the-airwaves radio pays zero royalties.
IRFA would lower rates paid to artists and recording companies, making Pandora potentially profitable. Another bill would force all players up to the Pandora rates. My question: would we be better served if all broadcast entities had to contract with the music owners rather than cut deals in Congress? Spotify, which lets you pick the songs you want to hear, is partially owned by the major recording labels. Maybe this is the business model Pandora, Sirius and broadcast radio should be adopting.
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