Sign up for MM  |  Manage Subscriptions  |  MM Archive

Sadly, Pandora Is Still Going Bankrupt

As I've written about for the Wall Street Journal, the online radio business is doomed because the required per song payment to the record labels is too high to ever have a profitable business. Recently a new set of rates were announced which press reports said "averted the royalty crisis". It's true the new rates are lower, but they are nowhere close to allowing a viable web radio business. Here's a closer look at what the press reported and what is true/false:

Webcasters can pay 25% of their revenues.
Answer: FALSE

While a surprising number of news outlets (The Register, Associated Press and countless blogs) declared this as an option for larger webcasters, it's not accurate. Webcasters are required to pay 25% of revenues or a per song fee WHICHEVER IS HIGHER. Because these royalties apply only to pure play webcasters (meaning they play music all the time), there is no reasonable scenario in which the per song royalty will be lower than 25% of revenues, rendering the revenue share component moot. This means webcasters will always end up paying higher than 25% of their total revenues. The record labels learned this effective press misdirection ploy when they announced a "revenue share" deal with Imeem. To make the deal appear equitable a revenue share option is emphasized, but due to the deal structure it will never come into play.

The new webcasting rates are lower.
Answer: TRUE

The new rates have lower growth (see chart below), however the old rates were so outlandishly high that even with the discount, webcasters are doomed. Most problematic in the old rates is the per song fee which requires webcasters to pay for each and every song regardless of whether it is generating any revenue for the company. The Pandora CEO calls per song fees an "anvil". The new rates do not remove the per song fee, neither do they change the starting point. The only change in the new rates is that the growth is 5-10% per year instead 25-50% which is a small consolation.

Web radio companies can now compete with other radio services.
Answer: FALSE

Traditional radio pays nothing to record labels while satellite pays 6.5% of total revenues. Online radio is required to pay a per song fee, which depending on how well the web shop can sell advertising, will be 40-100% (or more) of their revenues. When a competitor has such an enormous cost advantage, it is impossible to compete. As an example, Pandora estimates they will do 1 billion hours of streaming in 2009 which requires $17 million in royalties. They estimate they will do $40 million in revenue which equates a payment to the major labels of 42.5% of their total revenues. No business can operate with such an enormous financial obligation.

This ends a 2.5 year battle over royalties.
Answer: FALSE

Webcasters were facing an immediate execution so instead, they agreed to bleed a slow death. But to get these lower rates webcasters have to agree to not oppose the old rate structure in legal proceedings. They'll have to immediately pay several years of back fees, which for Pandora will mean more than $10 million dollars. Pandora is hoping to raise a large amount of capital so they are publicly saying good things about this settlement like "This is the deal we have been waiting for." Behind the scenes they know they do not have a business at these rates, but they are hoping to raise money to pay off the record labels and then continue on their fight in on congress to make royalties for all radio outlets the same and in the process dramatically lower webcasting rates. However this settlement will remove much of the momentum for rate changes lowering the prospect of congressional action.

The record labels are now entering into fair deals with technology companies which allow them to grow.
Answer: FALSE

"Supporting new business models through innovative licensing agreements is critical to the future of our industry," said Steve Marks EVP of the RIAA. He says the settlement is proof that the music industry wants to partner with technology firms. A Sound Exchange executive said, "We're willing to take the risk in the hope that artists, rights holders and webcasters can all benefit." However, these new rates have guaranteed payments to the record labels even if a company is not generating revenue. There is no risk for the record labels with these rates. It is not a partnership when one party yields the lion share of the benefit. These new rates are typical of the lopsided deals record labels have done with net companies in the past 10 years.

This blunt assessment of the online radio business is in contrast to most press reports, but those have been influenced by the parties with reasons to slant their words. The record labels do not want congressional action and want the perception to be that they do fair deals. Webcasters like Pandora need to raise money to survive so they need certainty in their business to entice investors. Consequently both parties are motivated to publicly say nice quotes about these new rates.

The economics don't lie. Experienced radio man Bob Bellin says, "No start up webcasting business can give up more than 25% of their revenue and make a profit." Bill Goldsmith of Radio Paradise says that long term viability requires a payment of no more than 10-12% of total revenues for both publishers and record label royalties. The new rates, while lower, are nowhere close to being sustainable. While I've used Pandora as a reference point to illustrate the situation, the same could be written about Slacker, Last.FM, or any webcasting company. Net radio is going to die a slow death in the United States.

Webcasting Royalty Rates
Old Rates New Rates
2006 .080 (cents) .080 (cents)
2007 .110 .084
2008 .140 .088
2009 .180 .093
2010 .190 .097
2011 .102
2012 .110
2013 .120
2014 .130
2015 .140


To discuss this topic with others, click here!

The Michael's Minute Meter
Total Votes: 425
Do YOU generally agree or disagree with Michael in this week's Minute shown above?
I generally AGREE with Michael this week
I generally DISAGREE with Michael this week
I am MIXED or don't have an opinion either way

View the Michael's Minute Meter Report

record radio; how to record Internet radio

Update from MR
Can't Make A Video Meeting? Don't Miss It - Use Zoomcorder to Send Snoop Dogg Instead
Is the Spotify Deal With Joe Rogan Illegal?
Why Im Not Wearing A Mask
Social Distancing Doesn't Have to Be Lonely - Can Help
Playing College Basketball Will Make You 6 Inches Taller (Or Why College Attendance Is Worth Close To Zero).
Turn The World of Radio Into A Personal Jukebox
Students Shouldn't Have To Pay For School Transcripts And Now They Don't In One San Diego Suburb
Is Your Kid Paying For Parking To Go To High School? Here's How To Challenge It.
How the Government Invisibly Tracks Smartphones
It's Not Just the NSA, Your Local Police Are Probably Spying On You Too
Why I'm Glad Net Neutrality Is Dead
My Dog Can Get A MRI In 2 Hours, Why Can't I?
Introducing The World's First Radio Search Engine
Is the Domain Name Worth Millions?
Besides Tracking Your Every Move Online, The Government Is Tracking Where You Travel - We're All Under Investigation By The Government All The Time
Hey NBA Commish - Replace Boring Jump Ball With a Challenge Ball
Friendship is Magic
Crowd Sourcing Protection
ACTUAL Stats for radio business and they're very revealing!
Radio Hooks-up With Twitter And UberTalk Is Their Love Child
The Tax Wolf in Bond Clothing
Take a ride on the
Radio Stations Are Dead - It's All About The Content - Introducing UberTalk
Download AM/FM Radio Shows To Smartphones & Tablets As MP3s Using

Copyright © 2001 - 2011. All rights reserved.