Will Royalties Keep Pandora From Being Profitable?

Lots Of Attention

It seems everyone is talking about PANDORA this week. YESTERDAY (NET NEWS 11/28), PANDORA once again topped TRITON DIGITAL's monthly Internet audio Top 20 Ranker for OCTOBER. Last TUESDAY (NET NEWS 11/22), ALL ACCESS reported PANDORA virtually doubled its third-quarter 2011 revenue compared to last year. Then on WEDNESDAY (NET NEWS 11/23), FORBES reported, "Already a large online radio destination, PANDORA is moving aggressively into local advertising by taking on local radio stations. The company considers itself one of the largest local radio stations in each local market compared to traditional terrestrial radio with 4.3% of total U.S. radio listening in the quarter."

All that info sent KATZ RADIO GROUP EVP/Radio Analysis And Insights MARY BETH GARBER to her laptop, where she composed an email (NET NEWS 11/28) writing, "Interesting press about the music playlist site, PANDORA lately, as they continue to try to position themselves as Radio. It would make a great project for a Social Sciences class -- how various press and bloggers, with rare exception, have simply accepted PANDORA's claims, skepticism-free, and then proceeded to exaggerate them even further."

Now, BUSINESSINSIDER.COM takes a closer look at the webcaster, with JIM EDWARDS writing, "I've previously expressed skepticism that PANDORA would ever be profitable because of the way its music royalty costs are locked into a suicide pact with its ad sales revenues: 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 listen and the longer they listen, the more songs they hear and the more PANDORA must pay out in music license royalty fees."

"There's nothing CEO JOE KENNEDY can do about the size of those royalty fees," continues EDWARDS, "which are set to rise through 2015 -- to PANDORA's huge disadvantage -- unless the company can renegotiate them downward. Royalties are an existential threat to PANDORA, basically."

Read the full article here.

And On The Other Hand....

Yet other observers are anything but pessimistic about PANDORA's quest for profitability. A well-known analyst, who requested anonymity, told ALL ACCESS, "What many observers fail to realize long-term is that PANDORA could even stay at roughly 40 million active users, thus stabilizing its royalties' absolute cost, but drop its percentage of cost position by boosting its commercial load over a few years time, as well as bumping up its CPM over a few years.  Observers tend to neglect to mention that PANDORA runs about one minute per hour. If they ramped it up to three to four minutes per hour, that still very favorably compares to the 16-18 minutes per hour of many FMs and 18-20 minutes per hr of many AMs in the perception of ad clients not liking clutter -- and even listeners.  Hence, profit margins logically, subsequently and significantly expand.
 
"The Moral of the math story," the source concluded, "is when a company has many different variables, don't be an Economics 101 professor and say theoretically if we only change one variable (active users) then all else being equal, the revenue and expense variables have to move in lock-step.  As Ec majors discovered at some point, in reality "all else being equal" never happens. Different factors tend to shift in reaction to company's moves and to consumer reactions and to competitor shifts."

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