Pandora Thinks Outside the Box

Cheer up, Pandora Music fans. Your music-discovery site will live to stream another day.

Pandora was one of the many music-streaming sites to receive a reprieve yesterday, when SoundExchange -- the nonprofit company that collects royalties on behalf of the recording industry -- agreed to relax rates that were set to skyrocket next year

Internet radio providers that agree to the new deal will pay up to 25% of their revenue to SoundExchange, a sweeter scenario than what Pandora was looking at last year, with payouts of 70% of to the music industry.

This is a win-win scenario. Pandora is popular, second only to Sirius XM Radio (Nasdaq: SIRI  ) on Apple's (Nasdaq: AAPL  ) App Store in terms of current popularity of music apps, even though Pandora's been freely available since the App Store's launch last summer. Despite the success, Pandora's future was threatened by the throat-squeezing royalty increases.

The industry wised up, I guess, considering that 25% of something is better than 70% of nothing.

Are music royalties fair? Terrestrial radio stations don't have to pay them directly to record companies, but satellite radio stations and music-streaming sites, which do an even better job of widening musical palates, with fewer commercials, do have to pay. Go figure. One has to wonder how much further music sales would fall if our exposure to tunes were limited to the FM dial.

Playing nice with Pandora may pay sweet dividends for the tattered music industry. Pandora now has more than 30 million registered users. A press release yesterday emphasized the ad-supported site's success in securing effective marketing campaigns. It specifically mentioned a Bay Area ad in which Pandora promoted a new Whole Foods Market (Nasdaq: WFMI  ) lunch menu. The 15-second audio ad targeted only those who were within seven miles of a Whole Foods organic supermarket.

Riding on the back of savvy tastemakers may be the music industry's best move in years. Warner Music Group (NYSE: WMG  ) isn't projected to turn a profit until 2011 at the earliest. Major artists are dumping their labels and choosing the open-ended potential of direct distribution. Striking revenue-sharing deals with Internet radio and sites such as Google's (Nasdaq: GOOG  ) YouTube will never be enough to fill the void of diminishing CD sales, but that's a point of no return. Non-terrestrial radio and video sites offer convenient promotional platforms. Profiting from them through revenue-sharing deals is gravy, at a time when the industry's meat and potatoes can use a little more sauce.

Other ways to crack open Pandora's box:

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Longtime Fool contributor Rick Munarriz is a subscriber to both Sirius and XM. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (7)

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 July 08, 2009, at 12:58 PM, JPS007 wrote:

    The royalty playing field needs to be level. FM and other NAB interests have been getting a free ride for too long. They need to by paying their share too.

  • Report this Comment On July 08, 2009, at 1:35 PM, betweenthehedges wrote:

    Who would want to pay for data and get Pandora when you can listen to the same crap on FM. I would rather not pay the monthly data costs, get a receiver like the Stiletto and pay 14.95 per month to have access to huge amounts of content and music. I don't mind paying the cost of a medium pizza once a month to get the real deal with CNBC, Fox News, Sports, great ad free music. Its a no brainer. Give up other radio providers. Sirius XM rocks.

  • Report this Comment On July 08, 2009, at 1:55 PM, betweenthehedges wrote:

    Pandora fans, you are sad for a reason, you are listening to Pandora. Listen. Cancel your data plan with your cell phone company : approx $30 per month, buy a Stiletto and get a sub for SIRI XM. Savings to you is $30 - $17, $13 per month or $156 per year. Break even first year with using the savings to buy the Stiletto and then save $13 per month there after.

  • Report this Comment On July 08, 2009, at 2:15 PM, JPS007 wrote:

    I've never used Pandora or Slacker, but how are these services different from Plain Old FM?

  • Report this Comment On July 08, 2009, at 3:06 PM, jsl4980 wrote:

    None of these services should be forced to pay these insane royalty fees (taxes). Radio, whether it's streaming or FM or AM or satellite, is a promotional tool for the recording industry. The music industry is now charging smarter and more innovative companies for promoting their content. This is a horrible business model that has created a deep hatred of the music industry among consumers and artists. Trying to destroy (through taxes and fees) every new and innovative service that promotes your content is not a sustainable business model - they're going to fail, it's only a matter of time.

  • Report this Comment On July 08, 2009, at 3:43 PM, TMFMitten wrote:

    JPS007, one of the biggest differences between Pandora/Slacker and terrestrial radio (or satellite, for that matter) is that you can customize your listening experience. With Pandora, you select the artists you like and set up personalized channels, and then Pandora plays those artists in addition to others that it thinks you might like, based on certain algorithms it factors into the type of music you selected.

    Slacker lets you turn off the "artist discovery" option, if you know exactly what you want on your custom channels, and it also lets you pick from a whole bunch of pre-programmed stations, based on either a genre of music or the musical style of a particular artist (the "Green Day" channel, for example, would contain a lot of pop-punk bands).

    I think both services blow terrestrial *and* satellite out of the water, because they put me in control of the listening experience.

    Regarding the article, I agree with the comments that there needs to be a level playing field -- there's no reason terrestrial should be exempt from these fees. Also, how does this agreement affect small-time podcasters?

  • Report this Comment On July 08, 2009, at 5:01 PM, betweenthehedges wrote:

    You can customize all you want to, there is not going to be CNBC, Fox News, NCAA Football games, Howard Stern, Oprah, Nascar, Baseball, NFL, on either Slack or Pan handler.

  • Report this Comment On July 08, 2009, at 11:59 PM, iPuck wrote:

    Pandora will not survive without charging a subscription fee, I think they are already charging on other countries. Once they start charging here, in it will not last.

  • Report this Comment On July 09, 2009, at 12:53 PM, TMFMitten wrote:

    @betweenthehedges: That's all well and good for people who don't mind paying a monthly fee to hear people talking at them on the radio. The talk shows are satellite radio's strength, but even then there's not enough of a benefit for me to justify hearing exclusive Howard or Oprah content -- and besides, I can get CNBC, Fox News, NCAA and NFL football, baseball, and auto racing on my TV. And for those of us who are more interested in music than talk, satellite radio just doesn't offer much of interest for the money.

    @iPuck: I think you can already buy a premium subscription service on Pandora. Slacker offers one that features unlimited song skips and no ads.

  • Report this Comment On July 09, 2009, at 2:28 PM, scottgeiger wrote:

    Pandora isn't quite staying free. If you listen to >40 hours per month you will have to pay, albeit a small $0.99 fee to continue unlimited to the end of the month or subscribe to PandoraOne premium service for $36/year. Pandora says that this change should only affect about 10% of their user base.

  • Report this Comment On July 09, 2009, at 2:47 PM, scottgeiger wrote:

    @betweenthehedges: regarding CNBC, Fox News, NCAA Football, etc. you are absolutely correct that you won't find those on Pandora. However, those news, talk, and sports programs are not affected by the royalty payments that this article was highlighting. If those programs are what you are looking for then I doubt anyone would even think of Pandora (I wouldn't).

    As for your savings calculations, first that only affects people that listen to Pandora on their cell phones/mobile devices and not those that listen on other devices. Second, I highly doubt many people have a data plan JUST to listen to music.

  • Report this Comment On July 10, 2009, at 7:11 AM, SIRIDoom wrote:

    FIRST MAN TO EVER DESTROY A MONOPOLY

    Yes, Mel Karmizine (Karmacrook) could go down in the history books as a big man. The first man in the history of the United States Stock Market to single handedly destroy a billion dollar corporation with monopoly over an entire industry.

    SIRI from 12.00 to 8 cents in 11 months.

    SIRI the only company to ever merge a bankrupt 11 billion dollar debt company XM, with a working model company SIRI.

    SIRI less than 8 months after the merger, Stock saturation over 83 percent in new issue and guarantees

    SIRI DEBT

    2010: ~$500mil in interest plus $350 in loans coming due

    2011: ~$500mill in interest plus $650 in bonds and loans due

    2012: ~$500mil in interest plus $500mil in bonds and loans due

    2013: ~$500mil in interest plus $1.8bil in bonds and loans due

    2014: ~$500mil in interest plus $555mil in bonds and loans due”

    Way to go Mel!!! Big Man!!!

    How about some news on the New Subscribers from the Ipod App.???

    Be ready to dump SIRI.

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