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Pandora Free Radio

Published on November 21, 2012 by in Viewpoint

A storm is brewing. There is a “fiscal cliff” coming for the music industry as a whole. We’re running at it full bore while attempting to slam on the breaks at the same time. The current spearhead for this is the Pandora free radio situation that is based in the U.S. This is the new Napster in terms of sheer destruction of being able to make a living as a musician. My quest is to get you to ask your congress person to veto the Internet Fairness Act and to help Occupy Streaming Services.

As of this post, the recent news on Pandora is several fold. One item is that Pandora has taken their company public earlier last year. Another item is that Pandora is lobbying congress to ask for a reduction in the currently discounted royalty rate. Yet another news bit is that they are now suing ASCAP over music licensing. It’s these three things that I would like to tackle on this post. Please excuse me that I’m not doing my normal showcasing of a song – this important stuff that affects musical artists all over.

Part 1: Let’s take a look at part one, Pandora going public as a company.

On June 15 of 2011 Pandora took their company public. Up until that point Pandora was started as the Music Genome Project, a group of musicians and musicologists that were interested in categorizing music based on several facets of music itself. A novel concept. This eventually led into Pandora radio where listeners can listen to an artist or song they love, then Pandora starts introducing other music that fits that sound based on their criteria and algorithms. Without thinking of the idea of profit, it’s a very utopian way to discover new music. Something that can bring a lot of value to music itself. So much so, that certain fools are valuing Pandora at over $3 Billion.

From day one of it’s start as the MGP all the way to it’s current Pandora status, it has never – I retype NEVER – been operating at a profit. Most private startups usually operate at a loss. They go after venture capital to help them survive and get their product off the ground. Eventually investors and owners want to make money with their product and something has to be done to make that money. Usually it’s charging an appropriate price for said product and getting the consuming public to buy it. Sometimes it’s done through shifty business practices. Unfortunately Pandora is going the shifty route. This is extremely disheartening considering it was started by musicians.

When Pandora went public, they only released 10% of their stock to be traded. Why? Well, as financial analysts say, it’s to give the stock price a boost, or bounce, to make it look more valuable. However, in the case of Pandora, it opened originally at $16 a share and now is at: $7.80 as of this post writing. Meaning even with a small amount of their stock out there, it’s not making people feel secure for investing. Again, Why? Could it be that even now they are still running at a loss.

In very simple terms profit works like this: Sales – (Product Costs + Expenses + Time) = Profit. If Profit is less than zero then you have a serious problem with your business model. Pandora has this problem. It’s lacking enough Sales to cover Product Costs, Expenses and Time. Based on financial experts at the WSJ, Forbes, et al, I’ve read the same issue crop up. Pandora is not charging enough or doing enough advertising in their service. Additionally Pandora was apparently inflating it’s user numbers and figures.

Which moves me into part 2.

Part 2: Pandora lobbies congress for a huge discount on royalties.

To start, Pandora is already getting a royalty rate discount. That’s right, their business model is already based on a Product Cost that is discounted. Now that’s out of the way…

Pandora is currently spending big money to lobby congress for a new Internet Fairness Act. They’re telling you and congress that they can’t operate under the burden of a discounted royalty rate. So, they want an additional 85% discount on the discounted rate. Wholy Fucking Hell – an additional 85% discount on top of the current discounted rate.

Their reasoning is that traditional radio’s business model allows them to pay only 4% of their income on royalty payouts. Pandora on the other hand says they are paying roughly 50% of their income on royalties. Their reasoning is, in order for them to make their business work, they need to be paying roughly 4% of income on royalties as well. But instead of actually doing it the same way traditional radio does, Pandora wants to put the screws to the content creators by going to Congress and fucking with royalty law and reducing the discounted royalty rate even further.

I’m going to digress for a moment to show you how much a stream is from Pandora. Drum roll please… A whopping $0.007 on average. That is the average that I see. I own my own label. I see the numbers. It’s shockingly low. It can be as low as: $0.0017. That’s tenths of a cent per stream, sometimes less, sometimes more. It averages around $0.007. Mind you, that’s to be split up by the writer(s), publisher(s). Now you’re taking that small amount and dividing it up further. There is a third split that goes to a company called SoundExchange that takes a little for the performer of the song – again, small small amounts.

Back to the problem. The simple formula I showed above is already in failure. Pandora blames the amount they have to pay to the writers, publishers, and performers as the problem. Business experts say it’s the lack of advertising as a whole. Right now Pandora does 13x, that’s thirteen times, less advertising than traditional radio. Wanna know a little secret? If you take 50% and turn 13x into it, guess what happens? It downsizes to approximately 3.8% That’s right, if Pandora were to advertise at the same rate as traditional radio does, their income to royalty payout would be equal to traditional radio’s ratio – on just their “free” streams, and they could go to full non-discounted royalties and still be making a profit without screwing the people creating the product. That’s not even touching the whole subscription service, which has no ads. All they have to do is charge base per stream to cover costs and base it on a flat rate of how many songs can be consumed in a month.

I can tell you’re thinking: No Fucking Way Jody! My response is: Yeah Way.

Naysayers will remark that if Pandora did that much advertising, they wouldn’t use the service. I don’t buy it. People still listen to traditional radio even with all it’s advertising.

I’m betting that even if they went to 6x less than traditional radio, they’d hit a profitable mark in their business AND they’d still be more attractive to listeners. Why aren’t they going this route? You should be questioning this. Lots of artists are.

There is no easy transition to part 3.

Part 3: Pandora sues ASCAP.

The nerve of a Performance Rights Organization (PROs of which there are 4 – ASCAP, BMI, SESAC, SoundExchange) to look out for the interests of who they represent – writers, publishers, and performers. Pandora is currently suing ASCAP due to royalty rates. Turns out that SESAC (which is who I’m represented by), BMI, and SoundExchange (who also represents me for my Performers cut), already have deals in place with Pandora. Those deals are set to expire in the next year or so. ASCAP was in a position to see Pandora go public with inflated numbers and thus asked for an appropriate royalty rate based on those numbers. Pandora balked. They’re upset that a PRO would base a royalty amount off of a company’s inflated business figures.

My thought on the lawsuit is this (remember, I’m not a lawyer). If Pandora has the money to sue, then they have the money to pay a non-discounted royalty rate. It’s highly unlikely they will win the lawsuit and it will likely mire in the courts for a while. Meaning they’ll be racking up fees if they continue to allow ASCAP represented streams. Not to mention court costs and the fact that ASCAP tends to win lawsuits.

I’m aware that the other PROs are very interested in seeing how this plays out. Mostly because when their deals expire, they’re looking to get an increased royalty rate for their writers/publishers/performers.

To end this.

I understand from a consumer’s point of view, you don’t likely give a shit. Who cares if the band/artist I listen to doesn’t make any money. I still love their music. It doesn’t affect me, so I don’t care. Right?

Wrong.

When an artist can’t afford to rent or buy a place to live, it’s a problem.
When an artist can’t sell/stream enough music to eat, it’s a problem.
When an artist can’t get insurance, it’s a problem.
When an artist can’t afford to record new music, it’s a problem.
When an artist can’t…

Get the picture? They eventually stop creating the music you love because it’s not sustainable in the Pandora model of making a living.

Don’t believe the hype of the Internet Fairness Act – it’s a hoax – write your congress person to veto this bill. It’s a bullshit way to rob the very people you claim to love enough to listen to to help make your day a little better though the act of music. Please share this post with your friends if you value the music that we music makers make. We want to be able to eat, sleep, and play just like you do. Please don’t allow Pandora Free Radio become the demise of the industry. In the long run it not only hurts us, it hurts you as well. Let’s also start an Occupy Pandora movement. Their addresses are here: Pandora addresses

p.s. – You may not know my name (it’s Jody Whitesides btw), but you’ve likely heard my work on TV, in film, in video games, or in trailers. I’m also on Pandora.

 
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