You can’t have watched the wild ride that the music industry has had since the rise of the Internet without being amazed that the business end of the music world has tried to resist the inevitable for so long. It is a foregone conclusion that the music industry as it was in, say, the nineties is merely history.
You can’t have watched the wild ride that the music industry has had since the rise of the Internet without being amazed that the business end of the music world has tried to resist the inevitable for so long. It is a foregone conclusion that the music industry as it was in, say, the 90s is merely history.
The problem is that rather than looking for new ways to sell their product, the industry has resorted to fighting with their customers, intimidating them, and even taking them to court! This has been a remarkably uncreative approach in an industry that is seen, ostensibly, at the forefront of creativity!
Nope, it is not the old guard that will resurrect and redefine the music business but rather the Internet entrepreneurs. This new breed has seen that there are ways of doing business that can be profitable without trying to have complete control over the consumer’s behavior – something that the old guard is apparently incapable of operating without.
Which brings me to this week’s focus: Pandora Media. Launched just over four years ago, Pandora provides a streaming music service but with a twist; you create “stations” that play music of a type that you can select and mold which then are played through a Flash movie in your Web browser. Pandora is also available as an application for the iPhone, the Palm Pre, and Android-based mobile phones.
Underlying Pandora is something the company calls the Music Genome Project. This algorithm is based on a multidimensional categorization of a library of some 700,000 songs, which allows the service to find music that fits the profile you create by example.
When you listen to a station you can indicate whether you like the song being played or not and add or remove artists from the roster. And, if you are so moved, you can browse for more information on the artist or the album and even purchase the track or album.
There’s some simple social networking support through the ability to share any of your stations with friends via e-mail but, surprisingly, nothing along the lines of a feature to post what you’re listening to MySpace, Facebook or Twitter.
Pandora provides free, advertising-supported accounts that allow for up to 40 hours of play per month or you can go for the Pandora One account which allows for unlimited playback for $36 per year with 192kbps delivery and no advertising.
I just had a very interesting telephone conference with Tim Westergren, the CEO of Pandora. As I noted above, Pandora’s major current source of revenue is from advertising which, Westergren told me, is moving towards more audio ads inserted into stations (so far these aren’t so frequent as to be more than slightly annoying).
He also told me that the company’s biggest expense is to performance royalties – absorbing about half of the company’s current $40 million revenue while ASCAP publisher’s royalties amount to a tiny 3.5%. While these fees sound very high, Pandora expects to be profitable by the end of 2009.
An interesting problem for Pandora is that they don’t get economies of scale – the more users, the more royalties they have to pay but advertising revenues don’t necessarily scale at the same rate so while the company needs a large audience to attract advertisers the incremental costs can outstrip revenue relatively easily – this business is a balancing act.
If you’re like me, once you try the service, you’ll find it addictive. Tim is very positive about the future for Pandora and the only destabilizing factor could be in the delivery cost structure where royalties are concerned. If the recent renegotiations and lawsuits over the rates set by the Copyright Royalty Board are any indication the old guard, in the form of the Recording Industry Association of America, isn’t going to be giving up easily.
