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Can Pandora Find a Business Model That Works?

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By Kyle Bylin (@sidewinderfm), founder and editor of sidewinder.fm, a music and tech think tank.

Royalty payouts and the burden they impose have always been a strongly debated issue when it comes to Pandora. The company has pursued numerous routes to lower the cost of music streaming from listening caps to government lobbying — some of which have been more successful than others. In this interview panel on Pandora, four influential executives in the music and tech industry weigh in on whether they think Pandora can find a sustainable, profitable business model.

Pandora Must Look Beyond Discovery In Order To Grow

By Max Engel | Director of Product at the web publisher SpinMedia, formerly BuzzMedia.

Pandora's fundamental problem is that it is a victim of its own success. This is the endemic problem of the space: that success is expensive. For Pandora to find a sustainable path to sustaining profitability for the foreseeable future, they'll need to innovate and diversify their revenue stream.

Pandora already has worked to bolster its ad platform to create a display ad network that can bridge the desktop and mobile. The company could potentially take its ad platform and possibly take it off-network so other music sites could benefit from their deep customer insights and targeting. Additionally, as I mentioned earlier, Pandora could also explore offering services to labels and musicians that create other means of monetizing their users and data. Project Daisy has alluded to offering tools like this, and given the company's ties to Topspin, it seems like a logical opportunity. Pandora could go down a similar route an make a smart acquisition or two to quickly bolster its offerings.

I do believe that their are compelling opportunities for Pandora to define a model that allows their business to grow without being burdened by royalty payouts. However, they'll have to look beyond basic discovery in order to do so. 

Monetization Around Digital Music Still In Infancy

By Vivek Agrawal | Co-founder of the playlist service Playground.FM.

While the current state of affairs would indicate that Pandora is in trouble, I believe that in the long run their approach is sustainable. Ultimately Pandora's business model is simple — pay royalties for streaming music to listeners, and collect revenues to pay for these royalties and turn a profit. The idea that Pandora is currently facing profitability concerns and opposition from rights holders is no different from satellite radio's high-fidelity ad-free programming in the 2000s and even the original terrestrial radio that decimated disc record sales in the 1920s.

The reason terrestrial radio and satellite radio ended up carving opportunities is because of their ability to enable revenue generating opportunities for themselves and the labels. In the case of terrestrial radio, they offered free distribution to a large audience of music fans; labels decided to use this to help generate demand for new acts, which spiked record sales for previously unknown artists. Satellite radio offered performance royalties and a share of equipment sales in exchange for offering exclusive access to premium programming. Today, Pandora is better educating advertisers on the power of personalized audio advertising, has made significant inroads into partnerships with car manufacturers, and is even collaborating with artists to help them plan their tours and potentially sell to their fanbase on Pandora. With such direct access to an engaged group of listeners, I believe Pandora (and Internet radio) can eventually find a model that is sustainable.

The key thing to remember is that this will take time. It took terrestrial radio 20 years to switch from destroying to surging sales for new artists. It took satellite radio 15 years to go from product inception to attracting millions of subscribers. We're merely 8 years into Internet radio, and it will be at least another 8 years before we see the full maturation of its revenue models. Digital music is still in its infancy, especially around monetization, and both the music and tech industries need to reach a deal that can make money for both sides. One thing's for sure, though: it is an exciting time to see the music and tech industries come together to create the future of music distribution.

The Music Industry Needs Pandora To Succeed

By Tony Hymes | Community manager at the music discovery website whyd.

The trend towards streaming music is undeniable, and in many ways Pandora is the bridge that gets people away from CDs and MP3s and into the cloud. It would not make sense to block this route to monthly paying services that end up being over $100 per year per user when the average amount of money that casual listeners spend on music in the US is a measly $44 per year (according to Nielsen).

No one wants to see Pandora fail, musicians are merely trying to set up their long-term positioning when it comes to streaming services. If they give ground now they will only lose more ground later. If they can stay strong (in their eyes) they can have a better negotiating position with all new streaming providers in the future, the direct result today is a tougher road for Pandora.

Adding other functionality to increase the use cases for Pandora is one way that they might be able to generate additional revenue. Licensing their recommendation system to another major player (still looking at you Google) and applying it to a much wider catalogue could be another boost the company needs. Finally, there are artists services, which could be cool for new artists to see what music is the most similar to them, and adjust their marketing plans accordingly. It won't take much to get Pandora over the hump.

Profitable Business Model Won't Happen Overnight

By Jason Keck | Founder and CEO of the social music application Stereotypes.

First of all, I think it's unfair to characterize royalty payments as a burden. Royalty payments compensate artists for their creative genius and hard work, and the costs are transparent to anyone who wants to use an artist's work.

In my four years doing business development at Shazam, the one thing that made me furious was a partner who would agree terms on a deal and then come back a year later and say, “Actually, we don't like these terms. It's too expensive. Can we have a better deal?" without offering anything in exchange. To me, it feels like that's what Pandora is doing right now. Pandora is lobbying for lower royalty payments, but I haven't heard them offering anything in return other than “we will stay in business and keep paying you."

Don't get me wrong, I understand that their business is at risk with the current royalty scheme, and that going out of business would mean a massive loss of revenue for the music industry. What's not clear is whether Pandora could be cutting costs in other areas to de-risk their business or whether reduced royalty payments is the only solution... only Pandora knows if they can cut in other areas.

All of that said, Pandora has great leadership and drives significant revenue for the music industry. I have no doubt that they will find a sustainable and profitable business model, but I don't think it's not going to happen overnight. They will need to win over artists and labels, and that will certainly take time!


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