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Online radio startup Pandora may have just filed for its initial public offering, but it admits there are still unproven aspects in its business model. In fact, the filing says that Oakland, Calif.-based Pandora expects to post operating losses “through at least the end of fiscal year 2012” (which runs until Jan. 31, 2012).

That seems particularly noteworthy since Pandora is the big success story to come out of all the online music experiments of the past decade. Apple recently listed Pandora as the third-most downloaded free iPhone app of all time. When Imeem founder Dalton Caldwell gave a talk last year arguing that the business model of music startups doesn’t work, he acknowledged Pandora as the one exception.

To be clear, Pandora’s revenue has grown dramatically in the past couple of years: It was $14.3 million in the fiscal year ending Jan. 31, 2008, $19.3 million a year later, then $55.2 million the year after that. And it brought in $90.1 million during the first nine months of 2010. But music royalty payments (described in the filing as content acquisition costs) have been increasing too, and the company says it has put listener growth ahead of profits:

As our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses. … In addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations.

The other striking thing about Pandora’s finances is to the extent that its revenue is still dominated by advertising, despite the launch of the Pandora One pay service in 2009. In the first nine months of 2010, Pandora says it earned $77.9 million from advertising and only $12.3 million from “subscription services and other”. That ratio may change as Pandora One matures, but until then Pandora seems to putting a much bigger on emphasis on ads. When listing the key elements of “building a successful long-term business,” the filing mentions new ad products but nothing related to subscriptions.

[image via Flickr/epSos.de]

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