Why Pandora Can’t Get Out of Their Box

Today I was turned on to an interesting article called Pandora founder pursues bigger piece of radio pieby Antony BrunoAccording to the article, the last quarter of last year was the first quarter the company has ever recorded a net profit.

But, to quote the article:

“Despite all this momentum, it’s not enough to sustain the kind of growth Westergren hopes to achieve. Pandora raked in $50 million in revenue in 2009, which the company hopes to double by the end of the year. Of that, it paid $30 million in royalties to the music industry as agreed to in the CRB rate settlement with performance rights organization SoundExchange.

That agreement calls for Pandora to pay either a per-stream rate for each song it plays or 25 percent of all revenue, whichever is greater. Pandora needs to generate 8 cents per user per hour to shift the royalty burden to the revenue-share model. Currently, it’s bringing in only 2 cents per user per hour.

‘Pandora can’t survive on network advertising,” Westergren says. “The site’s too expensive to run because of the licensing. We have to command premium rates.’ ”

Their answer to this seems to be creating a situation where artists offer content exclusively on Pandora, and then Pandora would sell the advertising for that content at “premium rates.” This has been found to work in the past for the company, with one example being a Dave Matthews Band listening party. However this solution can essentially only ever be a counter balance on the scale, to the royalty fees paid, and so they will constantly be in a struggle to both convince artists to give exclusive content to the site, and then to sell the advertising at the highest possible price.

Their solution equates to a wad of gum in the hole in the dyke. If Tim Westergren wanted to truly solve his problems once and for all, he will have to think about the situation completely differently.

Pandora mostly chooses to play well known, label signed artists on their radio, and this makes sense. It is presumably how they’ve gotten well known in the first place, but it was that choice that has also put them in the position that they’re in now. It’s the labels who have contracts with collection agencies like ASCAP and SESAC, and these are the people who Pandora ultimately shells out that $30 million to.

What Pandora has failed to realize, is that there is an incredibly larger amount of artists, and thus larger amount of talent, laying virtually dormant in the independent music scene, all over the world, without royalty contracts attached to them at all! This means there is a new opportunity to create an environment in the music industry that benefits the artists and the service/s that chooses to take advantage, to ditch the labels and the collection agencies once and for all, and create a new model, supported still by advertising, that would be void of the costly royalty fees. With that hefty $30 mil out of the picture, that scale will turn out to be a lot easier to balance, and even tip in the website’s favor.

It is Pandora’s choice to continue to support the label and their control over their artists that is actually causing their downfall as well, putting themselves in a very similar situation to the artists, in that the labels and their operational methods are leeching precious resources in an industry in which there are currently so few to be had.

And so it looks as though the only model that can sufficiently sustain itself will be one that is in the best interests of the artists. A service that can cut out the labels for the artists, would itself then be able to finally stay afloat and thrive.

This alternative, which is just now possible for the first time in history, is a new model that includes simply an online service, the artists and the fans, all linked directly – Simplified, without a middleman. This would result in a true profit-share solution, with truly fair percentages and full musical control possible for the artists for the very first time. It’s the web that finally makes this possible. So why hasn’t it been done yet?

This is a question I ask myself a lot..

ps – Check out the Beat-Play player!

Written by: Dante Cullari Founder & President Beat-Play, LLC


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