That’s nice: the profit-free streaming music service Pandora has successfully gone public, raising $235m in the process.
The public offering values the company at $2.6bn - twice as much as what it hoped for back in February, and not too shabby for an outfit that hasn’t yet turned a profit and is faced with rising royalty costs.
Pandora currently pays out 49 per cent of its revenues in music royalties, but these are on a sliding scale which is set to increase annually until 2015. This is a problem that terrestrial radio broadcasters don’t have – their costs don’t scale as popularity increases, and (in Europe) royalties are typically negotiated in advance and known.
US terrestrial radio has a huge advantage over webcasters in that it’s obliged to pay record companies for the public performance of the sound recording. The music isn’t free, as broadcasters must pay songwriters and composers, but it means music costs conventional radio stations 10 per cent, rather than 70 per cent, as it may cost Pandora in a few years.
Pandora has opted for explosive growth – going all out to increase its listener base ahead of this week’s IPO. So this is not the Ponzi economics of Groupon, but it’s a formidable challenge.
Internet radio veteran Kurt Hanson is bullish, though, and reckons the company is already profitable, or as good as. His logic is that Pandora is only running 80 seconds of advertising an hour, compared to the 10 to 14 minutes per hour that terrestrial radio runs. But there’s a reason for that: people don’t channel hop regular radio in the way they do on the web.
And Hansen admits that sales and marketing costs are taking huge chunks out of Pandora’s revenue – these must fall. But it’s hard to see how when the company wants to grow, and it’s going to be against some formidable big name competitors such as Apple, Google and Amazon, who have barely got going yet.
Pandora snagged $51m in revenue in Q1 2011, losing $6.7m. The company has cleverly positioned itself as a brand and a music platform, embedding its players in consumer electronics equipment. ®