Pandora can’t make money, may pull the plug

Buckling under the weight of the Internet radio royalty hike that SoundExchange pushed through last July, Pandora may pull its own plug soon. Despite being one of the most popular Internet radio services, the company still isn't making money, and its founder, Tim Westergren, says it can't last beyond its first payment of the higher royalties.

SoundExchange offered a potential reprieve from the royalty hikes, but that turned out to be a red herring to sneak DRM onto web radio. In the end, SoundExchange was able to initiate a massive (and retroactive) royalty hike on Internet radio stations, imposing per-user fees for each song. Adding insult to injury, the royalties on Internet radio will double for big stations by 2010, to an estimated 2.91 cents per hour per listener—far higher than the 1.6 cents that satellite stations would pay. Radio stations don't pay fees like these yet, but don't worry. SoundExchange is working on fixing that problem.

Pandora, its peers, and many of their collective users have petitioned SoundExchange and politicians multiple times, but nothing has worked. According to the Washington Post, Representative Howard L. Berman (D-CA) is attempting one more last-minute deal between webcasters and SoundExchange, one that could lower the per-song rate set last year, but he isn't optimistic. "If [the negotiations don't] get much more dramatic quickly, I will extricate myself from the process," Berman said.

If Berman is unsuccessful, Pandora will have to pay 70 percent of its projected 2008 revenues of $25 million. "At the moment we think this problem in Washington is not going to get solved," Pandora's founder Tim Westergren told the Post, "we have to pull the plug because all we're doing is wasting money."

While it's true that SoundExchange has had DRM and radio broadcast flags on its agenda for some time now, representatives of the company have also justified its stance on higher royalties from revenue and profit standpoints. Stations like Pandora, SoundExchange argues, have a higher profit margin and more value because they can broadcast an unlimited number of songs to their users. This dynamic ability stands in contrast to traditional and even satellite radio stations that broadcast a single song on a finite number of channels.

SoundExchange also argues that Internet radio stations could do a lot more to increase their revenue, become profitable, and pay their (arguably high) fees. As much as it pains us to say it, there may be a point here.

There's no doubt that SoundExchange has been strong-arming the Internet radio industry into oblivion. But most Internet radio stations like Pandora offer their services for free, or they offer accounts with more features at incredibly cheap prices. While some stations display ads on their website, Pandora hasn't done itself any favors by offering desktop clients and a wildly popular iPhone application (iTunes link) that rake in millions of users without so much as a single ad. Perhaps, for now, the "just build it and we'll figure out the business model later" approach won't be enough to save this experiment in new media.