Of late, the sustainability of streaming giant Pandora has become questionable. Losses are fivefold what they were a year ago, even though revenue has grown beyond a billion dollars.1 The service, as ever, depends upon its free ad supported streaming tier. Maximizing revenue, a strategy that ultimately guided the company’s growth, is being now reexamined in favor of cost minimization—although given the evidence presented below this would appear to be merely an aspiration more than a matter of policy. Neither does Pandora enjoy a profitable international presence: so far the only markets it has fully penetrated are the United States, Australia, and New Zealand.2
Events precipitated this year. A payout to the majors on the use of their pre-1972 recordings introduced a new expense line, while the Copyright Royalty Board’s (CRB) decision on the statutory rate met Pandora’s needs only half way. Even with the purchase of streaming service Rdio the value of Pandora’s stock plummeted. A recent New York Times piece suggests that discussions have started with Morgan Stanley to consider a potential sale.3
Money In, Money Out
About four-fifths of Pandora’s receipts come from advertising and with its recent acquisition of Ticketfly, Pandora has nevertheless added some momentum to revenue generation. Ticketfly allows Pandora to direct its music fans to events that may interest them.4 With a loyal base of eighty million active listeners, Pandora is now profiting from the ticket-sale market, where Ticketfly currently provides ticketing and marketing software for approximately 1,200 venues and event promoters across North America.5
Costs, as suggested above, have taken their toll. The company made a loss of $170 million last year. Pandora’s 2015 purchase of Rdio, for $75 million in cash, has no yield for now. Rdio’s technology and other assets are not operational, and this will only change when the service is launched as an interactive service, somewhat comparable to Spotify, later this year.6 In addition to the purchase of Rdio, there was a $90 million settlement for the use of pre-1972 recordings with Capitol Records LLC, Sony Music Entertainment, UMG Recordings, Warner Music, and independent record label ABKCO. About $70 million was paid out in 2015, and the balance is due in 2016 (there is little comfort knowing that Sirius XM paid more than twice what Pandora did).7 As well, Pandora paid $43 million in commissions to tech giants Apple and Google last year: this was essentially a levy on any subscribers acquired through the duo’s respective app stores rather than through a browser; the commission is expected be about $50 million by 2016.8
In December last year, the CRB came to a final decision on the statutory per-stream rate paid out to recorded music rights-holders by non-interactive digital streaming platforms. This statutory per-stream rate was set at $.0.0017, which was $0.0003 more than the amount that recorded music rights-holders currently received. The rate will only definitely apply to 2016 payouts, but not necessarily in the following four years (2017-2020), when it will be adjusted for fluctuations in the US Consumer Price Index (CPI)–which could bring the rate up or down.9 During the CRB’s decision-making process, Pandora made the case for lowering the per stream payout from $0.0014 to $0.0011. Conversely, SoundExchange argued for a drastic increase to $0.0025. Pandora will be paying out $94 million more to recorded music rights-holders in 2016 for the same amount of consumption, according to an estimate. Publishers and songwriters will make gains too.10
Since the CRB has raised the per-stream rate, it has made it harder for Pandora to survive. Scaling for Pandora was anyway a double-edged sword, always requiring higher payments to rights holders. Initially, those right holders had agreed on easier rates to allow growth and, back then, the establishment of Pandora. But Internet radio is now well developed, and the majors are not as easy going. The collective licensing agreement with SoundExchange is practical for Pandora though unpalatable, and unless Pandora can offer other services for a discount, such as the promotion of new releases, little will change.
It is in this context that Pandora has revamped its Artist Marketing Platform to support a direct-to-fan business.11 Its AMPcast feature now allows artists to target their Pandora fans by sending them audio messages about local concert dates, album releases, and other ‘behind the scenes’ content. AMPcast also provides links for the purchase of both albums and concert tickets. This new tool could be a market changer, for it would make the online radio provider not just a distributor of recorded music but an active player in the live music space. For Pandora, this chance at disrupting the existing business model may in the end hold the biggest promise of all.
By Shereen Cheong
1. Ingham, Tim. “Pandora Losses Hit $170m Last Year, As Active Listeners Shrunk” Music Business Worldwide. Music Business Worldwide, 12 Februrary 2016. Web. 13 February 2016.
2. Trefis Team. “Pandora Reports Mixed Results As Rumors Of A Buyout Surface” Forbes, 13 February 2016. Web. 13 February 2016.
3.Picker, Leslie & Sisario, Ben. “Pandora Is Said to Have Held Talks About Selling Itself” The New York Times. The New York Times, 11 February 2016. Web. 12 February 2016.
4.Trefis Team. “Pandora Reports Mixed Results As Rumors Of A Buyout Surface” Forbes, 13 February 2016. Web. 13 February 2016.
5.Ingham, Tim. “’Game Changer’: Pandora Confirms $450M Acquisition of Ticketfly” Music Business Worldwide. Music Business Worldwide, 7 October 2015. Web. 1 March 2016.
6.Ingham, Tim. “Can These Former Rdio Execs Woo The Music Biz For Pandora?” Music Business Worldwide. Music Business Worldwide, 25 January 2016. Web. 3 March 2016.
7.Ingham, Tim. “Pandora Pays $90m to Major Labels and ABKCO for Pre-1972 Tracks” Music Business Worldwide. Music Business Worldwide, 22 October 2015. Web. 1 Febru- ary 2016.
8.Ingham, Tim. “Pandora Just Had to Pay Apple And Google $42.6M in ‘App Tax’” Music Business Worldwide. Music Business Worldwide, 12 February 2016. Web. 13 February 2016.
9.Ingham, Tim. “Pandora Forced To Pay Artists Millions More – But Fares Well In Crucial Rates Decision” Music Business Worldwide. Music Business Worldwide, 16 Decem- ber 2015. Web. 1 February 2016.
10.Ingham, Tim. “Pandora Forced To Pay Artists Millions More – But Fares Well In Crucial Rates Decision” Music Business Worldwide. Music Business Worldwide, 16 Decem- ber 2015. Web. 1 February 2016.
11.“Pandora Turns Up Heat On Apple Music Connect With AMPCast” Music Business Worldwide. Music Business Worldwide, 9 March 2016. Web. 12 March 2016.