Putting Pandora Back in the Box

Remember a couple of years back, when everybody was talking about music-discovery service Pandora? The awesome term "Music Genome Project" was music to many people's ears. Unfortunately, burdensome royalty rates might now push this innovative service back in the box .

Pandora's Box, indeed
Pandora is among a growing number of music services harnessing the Internet's most impressive power: to drive new discoveries. You can already bypass traditional radio stations and simply listen to your Apple (Nasdaq: AAPL  ) iPod, because you know you like your own music. But Pandora takes that process one step further, delivering new songs that match the music "genome" of your favorite artists.

A very detailed Washington Post article on Internet radio's dire developments reveals that Pandora happens to be one of the 10 most popular applications for the iPhone. Indeed, it lures 40,000 new listeners every day, and has 1 million music fans who listen on a daily basis. Gee, I can see why the traditional music industry would want to nip that in the bud. It must simply be too awesome.

Although Sirius XM (Nasdaq: SIRI  ) had a great idea in satellite radio, which reflected myriad tastes and disrupted the longtime race to the bottom of traditional radio companies like Clear Channel, services like Pandora use technology and vision to find more stuff we like on a targeted basis.

This is nothing new, of course. Amazon.com (Nasdaq: AMZN  ) , Netflix (Nasdaq: NFLX  ) , and Apple have all been part of the new supply and demand with their recommendation engines. That's why Wired's Chris Anderson's Long Tail theory resonated with so many people.

This innovation must be stopped!
As usual, the music industry seems terrified of any innovation that might not cut its members as fat a royalty check as they'd like. Thanks to record labels' considerable whining, government and the music business seem to have joined forces to destroy popular services like Pandora, Last.FM, imeem, and Slacker.

The Copyright Royalty Board has upped the royalties Internet-based radio outfits must pay on songs, increasing the royalties to 19/100 of a cent per song per listener in 2010, from 8/100 of a cent per song per listener in 2006. In addition, retroactive fees mean that Pandora will have to pay 70% of its projected 2008 revenue, which appears to be a likely doomsday scenario for the service.

So far, the new royalty fees aren't even consistent. Traditional radio stations pay no royalties, and satellite radio pays a less burdensome percentage than Internet radio.

Part of the argument against Internet radio is that it brings in less revenue from advertising (which honestly, probably makes a lot of consumers like it more). The government and music industry seem to be demanding that the Internet radio services monetize... or else.

Not surprisingly, SoundExchange, which advocates for artists and major labels on royalty matters, defends the move. SoundExchange's reaction sounds like RIAA Jr., using the same old saw about defending artists and copyright owners and giving them their fair share.

I think many consumers are catching on that when the industry howls about defending artists, it's really just talking about defending the major labels' broken business model, which has been under constant assault ever since the world went digital. "Piracy" may be a dirty word, but I count historical events like Napster's (Nasdaq: NAPS  ) ascent as "innovation."

Positively Jurassic
The RIAA and its friends like SoundExchange are populated by companies like Warner Music Group (NYSE: WMG  ) , Sony (NYSE: SNE  ) (which recently announced plans to buy out BMG's share of the two companies' joint music venture), EMI, and Vivendi Universal. As far as I'm concerned, their draconian reactions to music's continuing evolution make them great examples of the types of companies and industries I avoid.

Services like Pandora do exactly what many music lovers want: introduce them to artists they may never have heard of otherwise. That innovation should be celebrated, not condemned. It promotes music that's geared to what we like, rather than forcefeeding us somebody else's tastes or marketing budget.

I often suspect the music industry also fears losing another element of its old-school model: finding mediocre musicians that appeal to only the most mainstream tastes and trends, and then pushing them down as many throats as possible.

As an investor, I do all I can to avoid companies that refuse to evolve, and thus find themselves on the wrong side of creative destruction. For the most part, I think the media industry fits that niche. Any company or industry that can perceive massive opportunity as a threat should strike investors as a long-term loser.

Tune into some related Foolishness:

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Alyce Lomax does not own shares of any of the companies mentioned; she's currently listening to Nine Inch Nails' Ghosts I-IV, and is proud she could buy it direct from the artist. The Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 22, 2008, at 11:52 AM, curtismj23 wrote:

    The record labels are so backwards in their thinking. Instead of realizing that this is a great way to sell more records, they make knee jerk reactions and go after the wrong guys. My online music purchases have gone up from an average of 1-2 songs per month, to 15-20 songs per month now that I found out about Pandora. No where else can I find as much new music that I like. It's the best music invention I've ever come across, and the labels should be jumping for joy, not crying about it. My friends all tell me the exact same thing.

  • Report this Comment On August 22, 2008, at 12:48 PM, KWT8011 wrote:

    This is an excellent article that ought to be featured on the front page. I especially like how you were able to tie it into refusing to invest in companies that won't evolve. I wish I came across more articles on TMF like this.

  • Report this Comment On August 22, 2008, at 1:05 PM, rkminc wrote:

    We recently launched an internet radio platform called Highnote which we feel is the scalable business model for streaming music. The idea is to bring artists and listeners together. What's unique is the promotional platform we're building which is targeted and performance based, with no irrelevant ads. Labels and independent artists get promotional exposure for their new music in the most natural way – played directly after artists that are similar. Ex: I am an unsigned band that cites Coldplay as an influence, I can promote my track into streams after listeners hear a Coldplay song. The crucial thing here is that revenue is cost-per-click based rather than cost-per-play... so a) bands/labels pay only for qualified traffic to their web sites which can then be monetized as the artist/label pleases and b) click-through rates and user response regulate the degree to which a promoted song gets wider play into music streams. No ads, just music, and just the type of music the listener wants to hear.The site is at http://www.highnoteradio.com. Feedback welcome.

  • Report this Comment On August 22, 2008, at 2:52 PM, stustanton wrote:

    The RIAA and its members are at war with their own customers. I for one don't like it one bit. It's a no-brainer, that that cannot last for long. They are done, and they know it. This from a 62-year old non-music fan. They are just one Internet innovation away from elimination.

    I'd like to see Pandora introduce that new innovation, a new criteria and a new service - aimed at introducing people to new artists that they've never heard and are unlikely to hear without minor support - and aimed at introducing artists to new venues of performing - artists who are not signed with record labels, newbies who ask that their songs be subject to less than the record labels lust - at 8/100ths of a cent per play or 4/100ths of a cent, 2/100ths, or actually for free until popular. The idea is to create a new way for artists to become known and paid for their music, one that isn't looted by the labels before it gets to the artist. Give us an RIAA channel, a 19/100ths of a cent per play option, where I pay per song if I want, and right beside it give me a "Support a Starving Artist" channel. Feed me my interests via that chanel. And alongside this, set up a way for artists to be signed to tours and concerts, where the artist's big money is. Level this playing field! Could my son's wedding book a local artist this way, or a Friday night party, or maybe a small town, or a big town, or a big-time promoter, for that matter. Level this playing field, and end this monopoly. I'd volunteer to pay my $8 for 10,000 songs (and still accept the advertisements), as long as it doesn't go to the Labels, to see justice, to see the RIAA and friends put straight, to support the Arts, to give the little guy a chance, and to encourage the genius in every person out there who has something for me to hear.

  • Report this Comment On August 22, 2008, at 6:18 PM, Fredlee009 wrote:

    Pandoras failure is Sirius's gain. Internet radio is a joke and the NAB and Sirius and the record companies will never allow it to get huge. Not enough money in it for them, they found a way to make sure they cant be profitable. Case closed. All the people who cry that internet radio is a powerful competition for other forms of radio are uneducated, immature, or just lying.

  • Report this Comment On August 25, 2008, at 4:40 PM, allandis wrote:

    The only voice we have as consumers is selection of goods and legistlation.

    To sponsor innovation, use the new medium. If Pandora is getting 40K new users a day, someone will take advantage. Napster proved this.

    We can't fight RIAA's budget, but we do have power in numbers. Make your voice heard: http://www.savenetradio.org/

  • Report this Comment On August 27, 2008, at 2:24 PM, MeltedMetal wrote:

    This situation is a prime example of a group of business people (major labels) who simply do not have the talent to capitalize on a new technological age.

    Corporate re-engineers' and change-manager's biggest obstacles are middle managers who actually undermine innovation and new process development, simply because mid-managers can see the end of their place in the new model. Instead of doing the hard work of re-positioning and re-educating themselves within the core the new models, they typically trip-up those new change programs in efforts to retain their paychecks for as long as possible, costing companies untold millions and years of implementation delays.

    This is now happening on an industry level, with major music labels acting like middle managers of a 1990s telecom company. Even though life as they know it is doomed, they still fight with myopic mindlessness in ways that only make their inevitable demise permanent.

    Bill Wilkins, CEO, Melted Metal Web Radio www.meltedmetal.com/scorch/save-net-radio/

  • Report this Comment On August 31, 2008, at 12:55 PM, mansfate wrote:

    The evolution of Internet radio has been in the process for 8+ years. Will pandora suffer the same fate as some massively-funded web radio plays? The key is positioning for change. Whomever wins will use a stealth, judo strategy. The audience certainly is there. Rather than a two-year skyrocket, success may take decades to achieve. Approach the problem like a Tibetan monk.

    http://www.brain.com

  • Report this Comment On September 10, 2008, at 9:32 PM, TMFLomax wrote:

    Thanks for all this great feedback, everyone! I enjoyed reading all these comments.

    Alyce

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