July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Yesterday, Pandora CEO Joseph Kennedy asked congressional leaders to pass new legislation — the Internet Radio Fairness Act — that lowers music licensing fees for Internet radio services.

Currently, services that stream music over the Internet pay higher licensing fees than traditional broadcast radio, satellite radio, and cable TV radio stations. That means the old  business models are inherently more profitable by default — something that Kennedy believes is an unfair advantage.

“The current rate-setting structure is a clear case of discrimination against the Internet and innovative services,” Kennedy said during House Judiciary subcommittee hearing, adding that its “fundamentally unfair and indefensible.” (It’s worth noting that this isn’t his first time to speak out about unfair digital music licensing.)

Right now, more than half of Pandora’s annual revenue goes toward music licensing fees.  The company generated a record $$101.3 million in revenue during FY13 second quarter by aggressively growing its advertising operations. And much like traditional radio stations, Pandora is now targeting regional ads and marketing sales. It’s also boosted the number of devices (including automobile dashboards), and experienced a drastic increase in the number of hours its users listen (3.3 billion listener hours last quarter).

Yet, Pandora is still firmly in the red — and has been for the last several quarters.

Others who testified at the hearing said Pandora’s inability to turn a profit is due to missteps in its business strategy.

President of SoundExchange, a non-profit organization that collects digital music royalties for copyright holders, Michael Huppe said Pandora chose to focus on increasing its audience with fewer advertisements and low subscription fees. (Essentially, he’s saying Pandora could have made sure its ad sales kept pace with audience growth.) During the hearing, he argued that artists shouldn’t have to sacrifice what they’re getting paid because Pandora isn’t a profitable company.

Others during the hearing argued that all radio businesses should pay the same music royalty rate as Pandora and other Internet radio companies. This opinion is supported by major music companies, SoundExchange, popular musicians, and other music performance organizations.

SoundExchange and trade group musicFirst even rallied 125 high-earning music performers to sign a letter speaking out against Pandora and the legislation that would lower digital music royalties.

As for lawmakers, the members of the judiciary committee didn’t seem overly swayed by either side’s argument.

What the future holds for Internet radio

If Pandora’s plea to congress fails, then one thing will become abundantly clear about the publicly traded company: it needs a new business model. That said, the company’s options are pretty limited.

It could start gobbling up traditional radio stations that spend less on music royalties, thus diversifying its revenue model. But that means Pandora would become an old school media company, with DJs, syndicated talk-radio programs, local promotional events (e.g.  Concert ticket giveaway at a local gas station that just opened), and maintain physical FM radio station facilities. This option is a giant step backwards, and clearly the opposite of innovative.

Another option Pandora has is to begin making its Internet radio service more palatable to independent artist that own the rights to their songs, as well as unsigned music groups looking for another clear path to profit off of their work. This will be more difficult, because any musician deemed successful on Pandora will be easily swayed to sign with one of the large music companies that can offer more exposure and higher profits.

Pandora can’t launch its own music publishing division, either — or at least not without consequence. If Pandora becomes a competing music company, its library of popular song licenses could quickly disappear, causing Pandora users to seek alternative listening options.

What does seem inevitable, is that lawmakers and regulators will eventually need to come up with a standard royalty rate across all platforms.

July 9-10, 2013
San Francisco, CA

Tickets On Sale Now

Although Halloween isn’t for another week, Pandora shareholders are experiencing quite a scare after rumors of last month’s Apple-branded Internet radio service resurfaced yesterday.

Apple could close important licensing agreements with major music labels by mid November and launch its own streaming music service by early 2013, according to a Bloomberg report that cites unnamed sources familiar with the matter. Apple’s alleged music service would likely mimic Pandora’s smart radio model rather than the much more costly on-demand model used by Spotify. It will also be ad-supported, but there is still an ongoing negotiation between Apple and the labels on how to split ad revenue, according to Bloomberg’s sources.

If the Apple radio rumors are true, Pandora has every reason to be scared — terrified, even.

The rumors alone sent Pandora’s stock crashing 21 percent, closings the day with a 11.7 percent decline. This is the second time we’ve seen Pandora take a nose dive over Apple rumors. I’d imagine the stock will perform even worse heading into the first quarter of 2013, when Apple’s Internet Radio service will allegedly launch. Other digital radio companies are also fearful of Apple’s entrance into the streaming music space. Sirius XM’s stock saw a decline yesterday as the Apple rumors took hold.

Apple is seeing a slow down in overall digital music sales and likely wants to keep its products competitive with a growing number of rival devices that offer their own streaming music service. And since Apple already has an advertising infrastructure in place via its iAds platform, the company has a perfect opportunity to jump into Internet Radio.

Apple could decide the fate of Internet radio rivals

My guess is that regardless of any dispute the music labels have with Apple’s ad-revenue split, the deal will likely move forward. Apple has shown that it can be a powerful player that can push the music industry around to get its way. And in this situation, the last thing music labels want is for Apple to align itself with Pandora and others that are currently trying to get a new piece of  legislation — the Internet Radio Fairness Act of 2012 –  passed that would lower the licensing fee rates from Internet radio companies.

Pandora is already struggling to stay profitable, despite reporting record high revenue over the last few quarters. Pandora is rapidly building its own advertising business, but as the company’s fiscal Q2 2013 earnings report shows, it’s not growing fast enough to compensate for the extremely high licensing fees.

Earlier this month Pandora founder Tim Westergen even spoke out against the current music licensing legislation’s unfair bias toward digital music companies. One very significant point he raised was that most companies simply cannot justify running an Internet radio business because of the licensing costs — specifically citing the fact that AOL and Yahoo abandoned their streaming music services. It’s easier for a giant corporation to eliminate a portion of its business that isn’t performing, such as streaming music services. Companies built entirely around streaming music will either succeed with meager results or die off.

The revenue music companies will pull in from the alleged Apple Internet radio would more than compensate for any money lost from the closure of Pandora. And something tells me that if Pandora does die off, neither the RIAA or the major music companies will shed a tear.