A Grim Look into Licensing Streaming Music

Hefty licensing costs continue to hurt Pandora,  the popular radio streaming service that went public in the middle of June 2011. Despite growth, the cost of doing business seems to rise along with the service’s popularity, which has much to do with SoundExchange’s royalty structures and Pandora’s reliance on advertising revenue. Pandora released their annual SEC filing with the harsh news about the factors working against them and their strides toward profitability. Here’s an excerpt: 

"Since our inception in 2000, we have incurred significant net operating losses and, as of January 31st, 2012, we had an accumulated deficit of $101.4 million.  A key element of our strategy is to increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses.

As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least fiscal 2013 [ie, January, 2013]."

And it’s not just Pandora that gets the brunt of difficult licensing structures and demanding major labels. With only around a 20% conversion rate from free to paid subscriber, Spotify is facing an uphill battle to justify their massive funding rounds totaling $189 million. Michael Robertson, always the contrarian in the music industry, went as far as to say Spotify can never be profitable. Factors including deal structure, labels demanding equity of companies, and up front payments all the way to more technical issues such as non-disclosure, data normalization, and reporting needs all work against massive scale streaming apps like Spotify (where content is licensed, rather than artists uploading music to the service on their own profiles). 

How do services get out of this mess? Well it’s difficult since it comes down to supply and demand. As Robertson continues:

“The sale of EMI to other music companies means there will shortly be only three major labels. If a music service rejects terms offered by a label, then that service’s offering will have an enormous hole in their catalog of 25 percent or more of popular songs.” 

Unlike Spotify, Pandora abides by U.S. laws based around terrestrial radio, and does not face some of the same problems Robertson lists as business obstacles for Spotify. Clearly, both are going to have a tough time hitting that coveted goal of profitability as record labels don’t always feel like budging and consumers don’t always feel like paying.