Pandora, Rhapsody woe and online radio's iffy future

Rhapsody

(MoneyWatch) Music streaming over the Internet recently saw news. Pandora (P) warned that growth is slowing and that it would make more shares available to raise capital. Rhapsody cut 15 percent of its staff on the arrival of a new investor. And Apple's (AAPL) iRadio is now available.

Streaming music can be a great service. Users get a variety of music for a reasonable price -- or nothing, if they're willing to listen to ads. Music labels and artists get additional forms of revenue. The only ones largely not getting a bargain are the Internet radio vendors themselves. How long can most of them survive?

Pandora's announcement of offering 10 million more shares for capital expenditures and announcement that growth was slowing sent its shares down almost 5 percent. Although shares jumped back up Wednesday, that was likely because of a court ruling holding that publishers could not selectively withdraw their music catalogs from the service.

The latter was good news. But the general outlook for Pandora is not been good. For years the company has been in a race to grow quickly enough to more than offset operating costs and the steady increase of royalty rates it has faced for streaming music. The music industry would much rather see people pay for music -- even downloads -- because there is ultimately more revenue per consumer than streaming, which pays fractions of a penny per play, rather than the 70 cents that an iTunes download might offer.

Pandora has been losing money for hears as it has tried to gain enough users that it could finally make a predictable profit. The company bought an FM radio station in an attempt to lower royalty rates -- and, still, songwriters are demanding more in royalties from streaming services.

With growth slowing, the model as it stands isn't sustainable. That's what the case of Rhapsody shows. Investment firm Columbus Nova took a stake in the company after which it laid off 15 percent of its staff, including the CEO. As The Verge reports, Spotify's losses have grown. Others such as Rdio and Grooveshark have seen their own problems.

Apple has jumped into the fray because it couldn't afford to stay out. The company likes to lock users into its own services, and that finally means streaming music. Any losses that might occur would be invisible given Apple's overall profitability. That may be fine for iPhone and iPad users, but does nothing outside of the iOS platform. Google (GOOG) launched a paid streaming service, which covers the Android universe, and it, too, can afford a significant amount of financial loss if necessary.

As for the relative popular streaming services, it isn't clear that any of them will be able to survive. The royalty deck is stacked against them and the greater industry likes it that way. The question has now become when most of these companies will begin to fall. And when that happens, will the giants that are left have any incentive to innovate or improve their services?

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.