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Wednesday, June 15, 2011

Pandora Goes Public for $3 Billion. Happy Face?

Posted By on Wed, Jun 15, 2011 at 11:25 AM

click to enlarge Ninety million users, zero profits.
  • Ninety million users, zero profits.

First, a word of congratulations to Pandora, the Oakland-based Internet radio service whose initial public stock offering today resulted in a nearly $235 million windfall to its investors. The company is now valued at $3 billion. You can buy its stock on the New York Stock Exchange. That's pretty awesome for a tech firm that nearly died three years ago. Many people love Pandora, it has a great idea -- even if part of our music-loving soul disapproves -- and it's the second-most popular app for Apple's iOS, ever. In a perfect (or even semi-reasonable) world, today's stock offering would be the symbol of an unqualified success.

Unfortunately, the IPO, the popularity, and the good vibes aren't going to change the fundamental predicament of Pandora and most other music streaming services: The record labels own the music they play, the record labels control how much they charge the companies to stream it, and right now, the record labels are charging too much for a company like Pandora to ever make a profit.

This was capably explained by our own Dan Mitchell yesterday:

Pandora, as it exists, is made to lose money. Because of the ridiculously high royalties it must pay to the music labels and the ridiculously low ad rates it is able to charge, Pandora actually loses money every time someone listens to a song.

Growth for the company means growth of losses. Unless it somehow manages to get the labels to renegotiate the royalties in 2015, when the current agreements expire (a highly unlikely scenario), or manages to charge much higher ad rates (also unlikely), or figures out some entirely new way to make money, it will never earn a profit.

Not that this lack of vision is really Pandora's fault. As Mitchell and many others have pointed out, the record labels might make more money by charging services like Pandora lower rates to stream their music. After all, Pandora has more than 90 million users. Those people like what the record labels are producing. But they like to get it through Pandora.

Maybe one day, an enlightened label boss (or four) will decide/figure out that services like Pandora are the future, and set royalty rates that would enable the radio/streaming services to turn a profit on their own. But until something big changes, the well-deserved champagne hopefully flowing through the company's Oakland offices today will carry a slightly bitter aftertaste.

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