Last week I read an article in the Washington Post about Pandora approaching a "pull the plug" decision because of the exorbitant fees it needs to pay to earn the right to play music on the internet. For those unfamiliar, Pandora is an internet radio site where users can create their own radio stations based on the music they prefer. The royalty per song that internet radio stations like Pandora pay to performers and record companies was recently doubled by the federal government. Satellite radio pays a smaller fee and traditional radio pays no fee. Doesn't seem like a fair system to me.
The music industry of course has powerful lobbyists that are likely behind the increase in royalty fees. To them, internet radio is robbing them of album sales and their position is that companies like Pandora need to figure out a better way to commercialize their service. Pandora generates revenue with ads, but perhaps there's a better business model out there.
But before thinking about potential business models, one must wonder if the music industry is taking the right stance. Many people have argued that internet radio is not only free music for the consumer but also free marketing for the record label and artist. From a personal standpoint I completely agree with that statement. In college I had plenty of time to explore new music and I built a huge CD collection by taking advantage of the 8 for 1 CD deals at BMG and Columbia House. But between college and now I have barely added to my collection. My only channels to new music were traditional radio, which I only listen to in my car, my friends, and the playlists at bars and clubs. Pandora completely changed that and became my channel to new music. Their personalized recommendations provide variety and exposure to music that I'm likely to enjoy. Now because of Pandora I've taken a new interest in music, including buying CDs and going to concerts. My experience is only one example, but I'm sure there are other similar stories. Collectively these stories would seem to paint Pandora as a pretty powerful marketing machine for record labels and artists.
Assuming that the music industry does not relent, what can Pandora do to be profitable? Pandora has two sources of value it needs to leverage: one, it is a channel for consumers to discover new music and two, it has a rich database of consumer preferences for music.
With respect to the channel, Pandora needs to increase its bargaining power with music vendors such as iTunes and Amazon. Pandora is sending consumers to these sites to purchase albums or songs they recently heard for free on Pandora. I don't know what revenue share they are receiving for this, but by adding additional music vendors, including companies like Ticketmaster, Pandora should be able to increase its leverage with these companies.
Pandora also knows who is listening to what music at any given time. They own a leading indicator of music trends that could be valuable to a company that sells or promotes music. More importantly, Pandora needs to use it database of consumer preferences to improve its advertising. Certainly the person who listens to Kanye West should be advertised to differently than the person who listens to Britney Spears. The million dollar question is what does an individual's taste in music reveal about his or her consumer behavior?
I sincerely hope Pandora finds a way to stay afloat. It certainly satisfies a consumer need and we all learned that satisfying a consumer need or pain point is the sure fire way to building a successful business. To be honest, I would be bummed if Pandora ceased to exist, but life would go on. Which begs the question, who needs Pandora more, the consumers or the artists and labels?
That's it.
