I’m a regular user of Pandora.com, which is a customized Internet-based radio station that plays songs based on your initial preferences. The whole thing is based on what they call the “music genome project”. Songs are coded according to their characteristics. This means that based on the songs you prefer an algorithm will play new songs with similar characteristics. It’s actually quite interesting and I have discovered some new artists I hadn’t known, but now really appreciate…
However, the last few days I noticed a change: Pandora now allows me to bookmark songs I really like and even purchase them directly through Amazon.com or iTunes. This is actually interesting because it represents a quite important tweak in Pandora’s business model. Whereas, a few months ago Pandora had no visible sign of a revenue model (and de facto no real business model) they now earn money from commissions when listeneres buy songs on Amazon or iTunes.
To me this looks a little bit like a Beta-business model that was introduced early to the market despite deficiencies (no revenue streams…), but is now changing towards something that works from a business point of view.
However, let’s do some simple calculations… What if:
* Pandora had 1 Mio listeners
* On average 10 songs are played per listener per week
* Pandora has to pay 0.1 cent per song to the copyright owner
* On average 10% of customers buy a song each week
* Pandora earns 10% commission on a price of 99 cent per song
Cost per week:
Listeners*songs listened*cost per song
1′000′000 *10*.001=1′000.- USD
So this was Pandora’s business model before introducing a revenue stream. Losing 1′000.- USD per week on 1 Mio listeners. But since there is now revenue sharing with Amazon.com and iTunes we have to add the following calculations:
Revenue per week:
Listeners*purchased songs*commission
1′000′000 *0.1*.099=990.- USD
Conclusion: This would mean 10.- USD loss without counting operating costs, such as server farms etc. Hmmm. I hope Pandora has negotiated a better deal with record companies to play songs at a cheaper rate and has stroke a better deal regarding revenue sharing with Amazon/iTunes. Also, once the former is a given I hope Pandor can dramatically grow its user base and their consumption pattern. Otherwise they will earn nothing but peanuts and probably not be able to cover their costs…
Pandora has always let you bookmark songs and buy them from iTunes or Amazon. The only thing that has changed recently is that we renamed the feature. It used to be called “favorites” and now it’s called “bookmarks”. We did recently release “backstage” (http://www.pandora.com/backstage) which expands your opportunity to use Pandora to find great new music to purchase on iTunes or Amazon. All of the pages “backstage” have buy links.
As for our business model, it’s the same as it ever was: we make money from advertising, subscriptions, and commerce. The big opportunity for us is advertising; as you point out it would be pretty much impossible for us to recover our bandwidth and licensing costs from commerce alone. Our costs are largely dominated by licensing and bandwidth. We are licensed through soundexchange, bmi, ascap, and sesac. Their rates are publicly documented and are not too far off from what you’ve written.
Hi Tom, thanks for the comment and for bringing a service to the market that I really appreciate (Pandora rocks)!
I admit that I was not 100% sure if you already allowed bookmarking & purchasing before. However, you have to admit that the bookmarking & purchasing feature is now much more accessible and visible, since you use a handy and prominent mouse-over feature on the song cover (sorry, I wouldn’t know how to describe this more accurately…). It’s no coincidence that I only discovered the feature lately…
Could you elaborate a bit on how you plan to make money from advertising and why you are not doing it yet on with the current service? Or did I miss something again
I would be really interested to find out more about your future business model journey.
A question about the basic calculation.
Can a $0.01 song royalty be paid for once for one song and broadcast to thousands of people?
Joe, you are raising a good point. That’s exactly where things have changed in the radio & royalties business. With traditional radio it wasn’t possible to estimate exactly how many listeners “consumed” a song. With Internet-based radio that changes. You can measure exactly how many times a song is played… In addition, with personalized radio you can influence the choice of songs that are played. This has an impact on royalties…
Maybe Tom Conrad can tell us how they pay royalties at Pandora
Warm hello from Chiang Mai, Thailand