Once again Pandora was bragging about its growth during the recent Investors meeting.
While user numbers and top line revenue figures paint a rather upbeat picture of the service’s future, the made-up metrics couldn't conceal the real story, the upside-down economics of streaming.
Business Insider recently looked beyond the hype and came to this conclusion about Pandora:
The more users it has, the more advertising it can sell against those pairs of ears. But at the same time, the more ears that listen and the longer they listen, the more songs they hear and the more Pandora must pay out in music license royalty fees.
Broadcast radio has efficiencies of scale. It costs the same to reach one listener or a million listeners. Compare that to streaming radio where costs rise with each additional listener.
Pandora’s revenues have doubled over the past year, yet royalties still consume 50% of Pandora’s revenue. On top of that, royalties are scheduled to increase another 37% by 2015.
Making matters worse, Pandora’s user growth seems to be slowing. According to Seeking Alpha, this quarter’s growth rate was the lowest in three years.
Pandora has to raise its advertising rates, or it has to run more ads.
Pandora users are already noticing the increased ads. One of the attractions of Pandora was the clean limited spot-load of the service. That image is already suffering with the increased load.
Loading up on spots will diminish it’s advantage over broadcast.
The only alternative is to raise rates.
The problem is that Pandora’s CPMs are already considerably higher than broadcast radio’s. The service’s ability to directly target users may be worth a premium, but there is a limit to what an advertiser is willing to pay.
While broadcasters can take some pleasure watching Pandora struggle, streaming’s perverse economics apply to broadcast streams as well.
Broadcast radio groups are essentially using broadcast profits to keep unprofitable streaming afloat.
If new-media pundits are right and ultimately most radio listening is done via streams, broadcast will see revenues decline and expenses increase.
Radio’s cost of doing business will look a lot more like Pandora’s.
That’s why it is important to continue to invest in broadcast. A dollar of revenue on the broadcast side is worth a whole lot more than a dollar on the streaming side.