Tech Tuesday: the Curse of Pandora’s Box

pandora screenshot wikipedia“He’s about to learn the most important lesson in the music business, don’t trust people in the music business…” Matt Greoning via Homer Simpson

Breaking news of the day was Pink Floyd calling Pandora streaming radio a sham, meanwhile David Lowery of Camper von Beethoven & Cracker fame via Gizmodo released what his menial payouts from the service look like. This, of course, comes on the heals of Billy Joel, Jackson Browne, Rihanna, Sheryl Crow, CeeLo Green and Don Henley and over 90 other artists signing an open letter to Pandora telling them to shove it in November of last year and artists like also posting their abysmal royalty sheets highlighting Pandora (and sometimes other alternative distributors)

There are those who would say these artists have already made significant bank. They were overpaid to begin with and their whining is a mark of the old regimes being shaken by technology.

As the story of Pandora’s box would have it, unleashing disruptive technology can have unexpected consequences in the most ironic of fashions.

It’s indeed true technology has created a disruptive seismic shift within the entertainment industry and in some cases it has been for the better for almost everyone involved. This leads some to believe that this is a problem with the outdated royalty system and content providers clinging to the last bastion of their old ways hindering progress by those who seek to do new innovative things.

For a service that claims over 200 million users and pulled a mighty $235 million in its IPO it’s difficult to see how royalties are the issue when it still pays significantly less than its peers in terrestrial broadcast radio, satellite and cable delivered radio and simulcasters.

The problem isn’t the royalties though, it’s Pandora’s whack business model that is holding them back.

We can all complain till we’re blue in the face about the fact that U.S. Copyright Law in general is a fiasco and the fact that the Federal Government still insists on setting “compulsory” rates for performance royalties but that’s an entirely different conversation. The regulatory atmosphere has influenced all entertainment technology, not just internet radio, and every company that’s participated in it, not just Pandora.

So, why then is Pandora complaining? Because they claim with the current rates they can’t make money. They’ve come up with some insanely poor parameters for their business model that have been criticized by everyone from Forbes to the New York Times to even some savvy listeners themselves. Yet, rather than confront the fundamental flaw of the income end of their business model the sole concern in 2005, again in 2007, in 2010 and again now has been and continues to be content fees. Sure, cost reduction is a concern for them, as it is for every single content distributor on the face of the planet, but what the fact they act like an ostrich about their income stream as a function of a truly successful business model makes the complains some have about Facebook or LinkedIn seem like child’s play.

Pandora currently serves about 8 to 12 ads per hour which can consist of 7- to 8 interaction-based display ads and 3 to 4 audio ads.

Most users will not get much value from the display advertisement. They select their Pandora station begin listening and then leave it on in the background. Although Pandora appears to be monetizing it’s ads at a might higher per hour rate than that of broadcast radio’s audio ads, these 7-8 display ads probably under-perform the average display ad significantly and Pandora probably serves fewer ads per visitor hour than their display ad competition. The inventory is worth less be particularly because mobile listeners (which in one Forbes article were quoted at being 80% of the listening base) are even less likely to see the ads then their desktop counterpart.

According to Business Insider Pandora increased its sales force, and placed more ads units (+112%) but at a huge discount from the prior year (-27%). It blamed the mobile ad mix because mobile ads are across-the-board worth less than their desktop counterparts right now but the real problem is the Pandora user experience is what devalues the display ad value even moreso, because the product is inherently an audio product, not a visual one.

Furthermore, the display number is too low for Pandora as well. On the desktop side, compared to other content driven providers that serve several units per page and new ads on each page refresh, the 7-8 per hour is exceedingly low. When compared to mobile apps, particular games, they move 2-3 times the number of units per hour.

This all equates to significant lost revenue for Pandora. Revenue that could be used not only for paying their sales and marketing force or continued technology development to their programmers but moreso to pay for the content they are redistributing.

As for the audio ads 3-4 an hour is between 1.5 and 4 minutes of ads. The average terrestrial broadcaster is running between 13-14 minutes of ads and a subscription satellite service is Sirius is up to 18 minutes. That leaves a minimum of 10 minutes of ads and their associated revenues left on the table by Pandora.

Finally, there’s rare a correlation between the visual ads displayed and the audio ad served for the user which leaves an entirely different kind of monitization strategy left on the table. If ads were paired in such a way to incorporate both the audio cue and the visual interaction it could produce a higher yield ad thus raising revenues further.

Similarly, their arbitrary 40- hour free streaming limit on mobile seems to also leave the potential revenue streams lacking as well.

The mistake Pandora fundamentally makes is that they don’t understand what they are in the business of. They foolishly believe(d) they were in the business of making a music algorithm. It solved for the end-user problem of finding the right music but it never solved for what that resolution was worth to the end user. Unable to put a price on what finely crafted music compilations are worth to a user they struggle to survive financially.

Broadcasters on terrestrial radio and television figured out a long time ago they were in the business of selling the time. They crafted the entire product around maximizing the amount of time they could dedicate to ads. It never was about the programming, the programming simply existed to create exposure to the ads. Print media knew the same thing, they were in the business of selling inches. The content between the ads was there as support TO the ads. Pandora exists diametrically opposite to this putting the content they under-pay for at the forefront and then struggling to pay for it because they don’t have effective monetization designed into the experience.

The product also only appears to resonate with users from a free perspective which is why they are unable to upsell the subscription service at a high enough rate to offset the cost their content costs. If there was a more compelling reason to subscribe such as the reason why people subscribe to Sirius or other content distribution services like Netflix then the bottom line might be better. Since they don’t have that and are unable to better monetize their free version by subsidizing it with ads and other monetization incentives they continue to fail.

And, ironically enough the tables are now turned and the cries of Pandora sound suspiciously like that of the RIAA and the song writer’s guilds at the turn of the millennium that everything’s so unfair. And the response to Pandora now should be the same as it was to the music industry then, adapt to the environment … or die of … but your bitching falls on deaf ears.

About thedoormouse

I am I. That’s all that i am. my little mousehole in cyberspace of fiction, recipes, sacrasm, op-ed on music, sports, and other notations both grand and tiny:
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