Online music streaming service, Pandora, is still struggles to make a profit even at is reaches 54.9 million active users. Even though the number sounds large, the startup is having a very hard time making money with its current profit model . Bloomberg points out that the nearly 60 million active users for Pandora are still less than the 63 million Facebook fans of music artist Rihanna, showing the type 0f scale needed to be a big player in the music industry.
The current user base has been gained through a lot of hard work. The millions of Pandora users would be a success story in most other businesses but not the music industry due to the hefty royalties being paid to artists. Due to contracts with major artists like Rihanna, Pandora is unable to make a profit.
The situation is highlighted by the relationship between Sound Exchange and Pandora. Royalties from online music firms are collected by Sound Exchange and then divided up between artist. According to records, the company paid $122.5 million to artists in the third quarter of 2012 alone. A major chunk of those fees came from Pandora, which stated in a quarterly filing that after earning $90 million from ads, $60 million was paid to Sound Exchange.
Pandora is lobbying the government to reduce the fees it is required to pay so that it can make profits moving forward. This will be hard because overall Pandora is not a very large player in the market. Even though it is the biggest online music streaming site, it does not account for even half of the online music world.
Pandora’s efforts are being thwarted by artists and Sound Exchange who are also lobbying the government to not give any more discounts on royalties being paid to artists. This puts Pandora in quite a bind because if they reduce fees the importance of Pandora as a revenue source for musicians will drop as they will begin to seek business elsewhere. Furthermore, if Pandora does not get lower royalty agreement it will not be able to stay in business.
Overall it seems that Pandora is stuck between a rock and a hard place and is very dependent on artists. For popular musicians like Rihana, Pandora does not represent a major source of income and Facebook fans translate into a lot more sales of albums on places like iTunes.
Source: Business Insider
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