Pandora currently holds the title as the number one online
radio station with 70.8 million current active users and averages 1 billion
listening hours a month. The first place title has come with a price as Pandora
currently pays the highest licensing fee for royalties as compared with its
competitors. The once positive relationship held between Pandora & their
content providers, has been strained by the clear message Pandora has sent with
the purchase of the South Dakota radio station KXMZ in a continual attempt to lower its royalty
payments paid to artists and musicians.
The problem
: Pandora’s concern
lies in shareholder value, at the cost of its content providers a.k.a
songwriters and musicians.
Let’s put Pandora’s business into perspective. They obtain
their product for free. There is no cost incurred for Pandora to acquire a vast
music library of millions of songs. Songs are submitted to them daily from
artists and publishers free of charge. No upfront commission or advance is
given. The cost ratio afterwards results in $0.0011 paid per radio stream. So from
an investor’s standpoint, Pandora is a company with 150 million user base, half
of them active who use the service 1 billion times a month. They obtain they’re
product for free, (talk about low overheard) and they pay one dollar and some
change for every 10,000 plays.
Focusing on the shareholders profits is not bad; in fact it
is great thing for most companies. Pandora’s drew a clear line in sand stating
we will do whatever it takes to protect the interest of our profits not at the
cost of the musician’s profits.
Let’s put this in perspective.
Pandora argues that traditional radio stations pay a lower
licensing rate. I <3 Radio which is
an internet radio company pays the same low rate as terrestrial brick and mortar FM stations because they are
owned by clear channel communications who operates the majority traditional (terrestrial)
radio stations. It’s not just I heart radio: Spotify, last.fm, Google play and
now Apple Radio all pay a lower licensing rate.
It would make sense to argue in the case of equal rates for
all streaming services but Pandora wants to equate themselves with paying the
same low rate as traditional radio stations. Here is why it can’t work:
·
Traditional (terrestrial) radio stations were
given lower royalty rates because radio play was considered free advertising
for songs that being supported by record sales.
·
The rotation ratio for a song on a radio is
miniscule compared to a streaming service.
If a #1 hit song was played three
times and hour, every hour for a year that would equal 26, 208 plays. Small
market indie bands get this airplay from online radio stations in 3 months.
Radio has a ceiling based on how many songs it can play in 24 hours. Online
streaming is infinite; the two cannot be treated equally.
·
Music currently is not being supported by large
record sales, and current trends dictate the future of music consumption to be
primarily streamed; not purchased.
Pandora is taking a step backwards in trying to apply
outdated royalty licensing rates to a modern music platform plagued by
declining music sales. It is not a matter of if, but when music’s sole
distribution is in the form of online streaming. At that point will $0.0011 per
play be enough to sustain a business model for the music creators who Pandora’s
whole business model relies upon?
What the consumer wants
Let’s face the facts, business is about the consumer. This
is true for both the songwriter and the distribution service like Pandora. We
know that music consumers want:
·
Convenient methods of consuming music. From
listening to radio in your car, to having your entire music library on your
phone, the easiest way to “tune in” dictates most consumers’ decisions.
·
A Digital format. While vinyl might be making a
revival, the percentage of digital music demanded, is exponentially greater
than all physical formats combined.
·
Cheap and Free. The mp3 standardized the $1 per
song valuation. Now online streaming provides listeners with an infinite
musical library at no cost. They have their cake and want to eat it for free
too.
The Trade Off
Artists currently use Pandora as platform for exposure.
Exposure for an artist has traditionally been worth its weight in gold. The
cost value of obtaining a fan base and getting heard has been worth as many
free songs that one could give away, because in the long run a majority of
those fans, would purchase your music. Today, however, music consumers have
moved away from traditional models of purchasing music and even the mp3
download has lost traction to subscription services that offer an unlimited
library. For an Artist, would the tradeoff be same if another internet radio
company offers better royalty rates per play? The question then arises, “how
much longer can Pandora market themselves to Artists and musicians alike solely
as platform of discovery?” Check out this graph for a visual on how much
artists truly make from online music. http://www.informationisbeautiful.net/2010/how-much-do-music-artists-earn-online/
The Bottom Line?
The future clearly is indicative that fans want to stream music
as opposed to purchasing it. If so, where will the funding come from? Ever
since recorded music became possible, fans have been able to have unlimited
access and use to a song for a small one time price. If future revenue is not
collected and paid to an artist before a consumer has unlimited access to the
song, the per play use for a song will in no doubt have to increase to a more
sustainable level. Online streaming services earn most of their income through
advertisements but we are now seeing many services (Pandora included) charging
monthly subscription fees for access to their libraries, in which none of this
revenue goes to paying for the content they provide. Should these companies
charge users a onetime fee per artist or album they listen to? How much are
music users willing to pay for and how much free music can Artists afford to
keep giving away?
By- Jackson hunt
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