[tveita]

Relevant opinion: http://www.usatoday.com/story/opinion/2013/06/23/pink-floyd-...

> "We've heard Pandora complain it pays too much in royalties to make a profit. (Of course, we also watched Pandora raise $235 million in its IPO and double its listeners in the last two years.) But a business that exists to deliver music can't really complain that its biggest cost is music."

Sounds reasonable enough to me. Do they have any other major expenditures besides hosting?

[smsm42]

This is a set of non sequiturs. First, raising money in IPO doesn't mean business is profitable or even viable - it only means whoever bought the stock think it could be in the future. They may be very well mistaken, especially if conditions change - such as royalties are increased or another regulatory or technological change happens. Increasing listeners also doesn't make it more profitable if they spend a lot of money on royalties - if they pay in royalties and associated costs more than additional listener brings in, more listeners means worse situation, not better. For Pandora's sake we'd hope it is not so, but the increase alone does not contradict Pandora's claim that royalties are too much to make a profit.

Also, Pandora does not complain that their largest expense is music, it complains it is so large that it prevents the possibility of them being profitable. It may be true or untrue, but the opinion in USA Today distorts it. Pandora doesn't claim it doesn't want to pay it all, it just wants to pay so that they still could be profitable.

Additionally, even if Pandora did make enough money per listener, the fact they spend a large portion of their revenue on royalties indicates that if this portion increases, their profit margins will vanish very easily. This is not contradicted neither by size of their IPO nor by number of their listeners, because this is a marginal game, not summary. So their argument is "if royalties increase, we die". The opinion you quote does not refute this. Of course, you could say "ok, so Pandora dies, who cares, good riddance, they should have built their business better" - but that'd be completely different argument. And on this argument one should notice that in this case the authors probably would get $0 royalties for internet performances if no viable business would be possible for it.

[jcampbell1]

From the most recent 10Q. Revenue was $125M ($105 Ads / $20 Subscriber). Expenses: $82M Content, $10M hosting, $7M Prod Dev., $40M Marketing/Sales, $14M All Other. Net Result: $28M loss.

[chiph]

I wonder how much of that marketing costs are from their own interstitial ads between songs? I would think the cost to them is $0, but I wouldn't be surprised if they valued it at market rates. Perhaps to keep the IRS happy.

[jcampbell1]

> I wonder how much of that marketing costs are from their own interstitial ads between songs?

Zero.

Marketing and Sales is primarily the cost of selling advertisements, including all the required employees. Selling $100M worth of ads isn't easy, (unless you are google).

[winterchil]

This would absolutely not make the IRS happy.

[Guvante]

So long as you count it as revenue and aren't publicly traded you are fine.

Pretty sure anyone subject to the real rules is disallowed from doing this thanks to the dot com boom/bust.

[awa]

If they show a expenditure of $40M in MArketing for pandora ads, they are probably adding that $40M to their revenue

[jcampbell1]

You can't do that with public financial statements. When preparing financial statements, there is a process called intracompany balancing, where you pull out any revenue/expenses that were generated within the reporting entity.

If that nonsense was allowed, then every company would show revenues in the billions. The finance department would pay the the HR department for HR services, the marketing department would buy millions with their own company, etc.

It is common for internal accounting books to record these intracompany expenses/revenues for record keeping. For instance a TV Show pays for ads on the same network, but before Disney reports profits publicly all of that accounting cruft must be removed.

[gohrt]

Or they spin off sort-of-separate entities to move the profits around (Hollywood Accounting)

[epa]

Not allowed. Any related parties have to be disclosed and will be removed on consolidation of financial statements. Unless both parties are totally separate entities with no relation, we are moving into fraud territory.

[tsotha]

That only works between entities in different countries, though they can use the strategy to dodge liabilities.

[logn]

I'd argue that rivaling music, pandora's biggest product is their music recommendation system. It's second to none in my opinion. Google has clearly put together a good system too recently with their generated playlists, and last.fm has had similar recommendations. However, as far as a recommendation system that exposes you to new, different music you would have never selected on your own, Pandora makes good choices with surprising accuracy.

Part of that is their Music Genome Project where human beings listened to every song Pandora hosted and rated every aspect of it. I'm sure now they just have a ton of other useful data from listening habits. Regardless, I think the music could almost be seen as secondary.

If all Pandora wanted to do was have me pay $36 dollars for a weekly, automated newsletter telling me of new songs I might like and then collecting my feedback for future newsletters made for me, I'd likely pay for that. They could even alert me to new concerts in my area. Of course, the music streaming ties that all together in a really compelling way.

So, I think if anything you could say that about 50% to musicians and 50% to programmers and staff and overhead sounds about right. Hopefully they manage to eek out a profit to stick around.

They'll be greatly missed if all that's left one day is iHeartRadio and the same old industry pushing the same old method of selecting hits.

Pandora is undeniably a good way to listen to music, and all anyone wants is to ensure they have a fair way to compete.

No one likes seeing artists go hungry. But we all also recognize that if there's anyone being unfair to artists, it's the mega industry from the prior era.

The new industry involves artists owning their work and paying $50/year at TuneCore or similar companies to get their music distributed to companies such as Pandora. Or, they sign up to traditional album sellers like BandCamp or CDBaby. It's simply the most efficient way to do it now.

Absolutely we appreciate the music industry for almost a century of fantastic art and culture. But they either need to adapt or gracefully accept their new role, which is a purveyor of American classics and the niche hype machine for the few mega acts of pop music who actually get good terms on their contracts with major labels.