Wednesday, June 01, 2011

Pandora: Profits And Prophets

I will leave it to Mark Ramsey and Jerry Del Colliano to post daily sarcasm-laden advice to terrestial radio.

Instead, as you wait for "Hear 2.0" and "Inside Music And Media" blogs to load on your other browser tabs, I'd like to humbly direct you to Jim Edwards' blog (Pandora’s Business Model Looks Like a Suicide Pact).

Pandora is locked into a Catch-22: The more users it has, the more advertising it can sell against those pairs of ears. But at the same time, the more ears that are listening and the longer they listen, the more songs they hear and the more Pandora must pay out in music license fees. The company seems to realize that its business model, for the next 18 months at least, is a mutual suicide pact between its music costs and its revenues:

Content acquisition expenses increased $16.5 million due to increased royalty payments driven by increased listener hours and by higher revenue.

While we had net income in the fourth quarter of fiscal 2010 and the second and third quarter of fiscal 2011, we expect to incur losses on an annual basis through at least the end of fiscal 2012.


Meanwhile, good ole fashioned local radio reaches more than nine of ten Americans every week and has solid profits on a station by station basis in all market sizes.

Someone may get rich owning Pandora in the near future (can you spell LinkedIn?), but the company's viability in the short or even medium term remains a question mark.

"Scale" can be a good thing ... as long as you're not scaling an immense wall of growing debt, and your operating costs aren't accelerating faster than your revenues.

3 comments:

Jennifer Lane said...

More than one of every three Internet users will listen to Internet radio weekly this year, reports EMarketer. That 37.5% of 12+ Internet users in the US means more than 79 million listeners to online radio. That number will continue to grow and hit 157 million and 67% of that population by 2015.

Ray said...

Even Moore's Law has come to a halt. You remember, the projection that computers would get faster and faster and faster, doubling every 18 months. Something funny happened on the way to this doubling of speed.

Physics.

The idea that things will keep growing forever is what keeps Wall Street fleecing suckers of their money. It's the same stuff that gives us projections of $10,000 gold (based on the current projectory and blah, blah, blah)

The early adopters are already off internet radio in my estimation. We're rapidly reaching mainstream acceptance. We are in the "early majority" stage of the technology now, perhaps heading quickly to "late majority".

The graph in Jaye's blog shows perfectly a business who's costs rise as fast as revenue is destined for failure. Unless you run the printing press. Either find a way to control costs (good luck getting the rights holders to take less) or increase revenue (it's been free with limited commercials..so maybe increase commercials?)

Pandora is about to find it's printing press in an IPO on Wall Street. Pandora is not profitable now, has never been profitable, and probably won't ever be profitable based on the costs. But a Wall Street banker will be laughing all the way home.

Audio4cast said...

Roughly 23% of Sound Exchange’s total revenues in 2010 came from Pandora, based on publicly reported info and some quick math by Live365 Attorney Angus MacDonald.