Will Pandora Play 'The End' Soon? Royalty Rate Hikes Could Be Its Demise

Matt Kapko
Monday, August 18, 2008; 6:07 PM

Some potentially sad news today for music fans who like their music free, but don't want to risk the recording industry's wrath. In a candid interview with the Washington Post, Pandora founder Tim Westergren said the company is "approaching a pull-the-plug kind of decision," a potential "last stand for webcasting" as royalty fee increases begin to take hold. Perhaps it's a well-honed ruse to drum up support from the company's million-plus users who listen to Pandora daily, but there are some dire economics standing in the way of web radio. Last year, the Copyright Royalty Board ordered per-song performance royalties to be more than doubled for use online. Rates will increase from 8/100 of a cent per song per listener to 19/100 of a cent per song per listener by 2010. Pandora's royalty fees this year are projected to hit $17 million, about 70 percent of its projected revenue for the year. The fee increases don't effect traditional or satellite radio, but SoundExchange, an organization that represents artists and record companies, is trying to up those rates as well.

"We're losing money as it is," Westergren told WaPo. "The moment we think this problem in Washington is not going to get solved, we have to pull the plug because all we're doing is wasting money." Pandora makes its money from ads placed on its website ? no ads run between songs, but it plans to start airing brief sponsor ads in the audio feed that will say "something like 'the next half hour is brought to you by ?," Westergren said. "We're taking this challenge very seriously? When we have our board meetings, the central topic is the revenue trajectory, not how happy our users are." Bringing it down to basics, Westergren concludes: "We're funded by venture capital? They're not going to chase a company whose business model has been broken. So if it doesn't feel like it's headed towards a solution, we're done."

Pandora developed an extremely popular iPhone application that's successfully brought many new users on board, but innovation and positive user experiences only go so far. While the company cherishes the fact it was founded and started by musicians, it's not operating Pandora for purely altruistic measures. There is some opposition growing at Congress, but it could be too little too late. And the outlook doesn't look great on that front anyway. Will Sirius XM face similar rate hikes as it looks to push its reach further beyond satellite receivers and onto the iPhone, for example? Access to music is converging around all of these technologies. Perhaps a single, universal rate should be legislated across the board. After all, wouldn't that create the healthiest competitive landscape for all players? What do you think?

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