Pandora's Westergren Hints No Solution In Sight for Music Royalty Swamp

Last Updated Sep 29, 2011 7:55 PM EDT

Pandora (P)'s founder and chief strategy officer Tim Westergren appears not to have solved his company's existential business problem: How to make money when your built-in costs are automatically higher than the revenues they generate.

He gave an interview in what should have been a softball venue -- Mashable's "Extraordinary Entrepreneurs Series," sponsored by Diet Coke. But when asked what his "biggest challenge" was, he revealed it was royalty rates, the licensing fees Pandora must play on every song.

As I've noted before, Pandora can only generate ad revenue when someone plays a song, but the royalty cost of each song is always more than the ad revenue it generates. Westergren said:
One that is still fresh in my mind was the fight over royalty rates when we almost went out of business because the rates imposed by the copyright tribunal were astronomically high.
Our next great challenge is going to be tackling the licensing issues internationally.
"Almost went out of business"? Pandora is so unprofitable that it is technically "out of business" on an ongoing basis. The only reason it has cash is because it sold stock in an IPO. Westergren's No.1 strategy problem is to persuade record labels to lower their royalty demands before he burns through all that equity cash. On that topic, he said:
Pandora plays the music of over 90,000 artists. This translates into a substantially larger number of rights owners -- the artists themselves, labels, publishers, etc.
Without a one-stop shop for licensing, it's administratively difficult to enable the service. Where these centralized entities do exist, they have demanded royalty rates that are completely uneconomic. I would argue that in so doing, they are failing to serve their very constituents.
"Uneconomic" for whom, exactly? Not Sirius XM, that's for sure. He's actually talking about himself. The SEC requires Pandora to warn investors that unless it can renegotiate industry-wide royalty rates lower in 2015 that it is "unsustainable" as business. It appears that the challenge remains as yet unmet.

Related: Image by Wikimedia Commons, CC.

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