Pandora and Internet Radio

On August 16, 2008, the Washington Post ran the news story, “Giant of Internet Radio Nears Its ‘Last Stand’,” referring to Pandora.com.  Pandora is a standout Internet site that allows users to create custom Internet radio stations based on their favorite songs and artists.  It’s a unique way to discover undiscovered music showcasing technology that gets about a million daily listeners.  The Post quotes Pandora’s founder Tim Westergren, “We’re approaching a pull-the-plug kind of decision.  This is like a last stand for webcasting.”

The problem is one of paying royalties.  Right now there are a number of technologies that broadcast music:  traditional radio, satellite radio, cable TV radio and Internet radio.  Oddly, they each pay different rates to play music, and it looks like the music industry wants Internet radio to pay the most.  If this happens many sites will shut down.  Pandora has yet to make money but anticipated to go into the black in 2009 if the rates were not increased.

There are many articles about the death knell of Internet radio showing up now, with the implication that if the rates these sites have to pay goes up they will close their doors.  I think other things might happen.  Why give up on a new business model so quickly?  Pandora is actually a superior way to listen to random music – it’s superior because it’s less random but still random.

There are two way to listen to music.  You think of a song you want to hear and you play it, or you turn on a broadcasting system to play music for you.  The first method usually involves owning the song, but subscription music is a variation of that.  The second method, random listening, involves finding a source that’s close to your musical mood.  In the old days, a city might have a dozen radio stations and you picked one to play, or if you were in your car, you programmed your five radio buttons and jumped between them.  Satellite music offers more variety by giving you more stations to choose from.  Internet radio ups the variety factor further.

Pandora let’s you pick a seed song and then Pandora plays songs their Music Genome Project software thinks will match your taste.  You can click thumbs up or thumbs down on their picks to help the software zero in on what you like.  It works exceedingly well, but it’s still random music, or broadcast music.

Now I want musicians and music producers to get all the money they can, but I don’t want them to unfairly charge one random music technology more than another, and that appears to be a key issue with Pandora and other Internet radio sites.  Another random site I like is Playa Cofi Jukebox, which allows you to seed your mood by picking a year and it broadcasts random songs that came out in that year.  That’s another triumph of technology in my book.  I want these sites to succeed.

Pandora is thinking of ways to improve its ad revenue and that’s good, but I think they should think of other ways to generate revenue.  I pay for cable TV and a DVR so I see less television ads.  I would be willing to pay a fee to Pandora to not hear ads.  They should run ads, but allow users who want to pay not to listen to them.  Another possibility is to merge with a subscription service like Rhapsody or Napster and be an extra selling point for those companies.  Rhapsody has random radio stations for when I don’t want to pick my songs, but it would be even better if they had the Music Genome Project technology.

I have come to see great value in random music because of shuffle play of my MP3s.  I can even add Music Genome Project like tech to my own MP3 library with MusicIP software.  But Pandora beats my collection of 17,081 songs by light years.  And I can play it on my iPod touch.  I really do not want to see Pandora and other Internet radio stations go out of business.

Another option, rather than increasing royalty rates, could require Pandora to provide links to songs that take users to sites selling the song.  Sites that would also provide a commission to Pandora.  Pandora could offer a variety of online music stores and users could check box their favorite when they register.  Increased sales should offer better revenue than broadcast royalties.

Don’t get me wrong.  I’m not wanting free music.  I believe free is bad.  I want the music industry to make their money and I want Pandora to make money and I’m willing to either listen to ads or pay a subscription to get what I want.  It will be a shame if the industry that collects royalties forces these new sources of random music out of business.  I don’t listen to traditional radio anymore.  I’m not interested in satellite radio.  I have cable TV radio but I don’t use it.  I’m an Internet person.  Why should random music businesses pay more per song for customers like me than the other businesses pay for their customers?

Jim

If you read the Slashdot thread listed below one reader posts the suggestion that Internet radio should just stop using songs that require royalties.  That’s an interesting idea, but I think ultimately it’s a bad idea.  Free is not good.  If this idea succeeded it would kill off a whole industry and destroy legions of jobs.  If the writer’s purpose is to promote new artists and bands, it would be better to use Pandora and help these new musicians gain an economic footing, rather than turn the music industry into all amateurs.  The Music Genome Project would work just as well with unknown artists.

The real virtue of Pandora is when it plays a song for you that you’ve never heard but you love it so much that you buy it.

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3 thoughts on “Pandora and Internet Radio”

  1. When I first heard about and tried Pandora, I was blown away! I actually created a non-stop music station that sort of intuited my musical tastes (although there were some notable artisits absent, such as Frank Zappa). But I found myself almost never listening to it after that early “Wow!”. I am admittedly an NPR junkie, and find myself listening to streaming programs more often than not while I work. But I will deeply miss the option of having Pandora around…killed for ALL the wrong reasons. I believe that we are witnessing the last days of the music industry as prime conveyor of real music (the roster of Disney popstars and other pop pablum like American Idolators will remain in that domain). Witness that Nine Inch Nails and Radiohead released their latest music via the Internet. This will level the entire playing field in the future, as anyone with an Internet connection and some HTML know-how will be able to upload their music for the world to hear. And for these independents’ music videos? YouTube! What, no business model in this scenario? EXACTLY! This is the return of the democratization of music – free music for the people! Money will be made from bands touring, selling merchandise, and the deluxe CD versions of the music w/accompanying materials, etc. The Revolution will be Webcast!

  2. Here’s my guess at why the music industry (as opposed to individual artists) thinks Pandora and ilk will hurt it:
    1) Let’s assume that the average person listens to 1 hour of radio a day.
    2) At current royalty rates, that’s like $0.48/month per person in radio royalties.
    3) Because the person can’t hear precisely what they want on the radio, they buy CDs. Assume the average person buys 2 CDs/month.
    4) I don’t know the precise royalties for CDs, but I think something like $0.75/CD is a good estimate. That’s $1.50/month in royalties.

    So, for the music industry, radio isn’t really the way to make money, it’s a way to convince people to buy the CD, where they make 5 times as much money.

    On the surface, Pandora follows the same model – people hear the songs, and if they want to hear them a lot, they need to buy the CD. So why charge them more?

    Except that Pandora has the potential to make it unnecessary to buy the CD. I mean, right now, it isn’t as easy to customize your Pandora as you’d like. But as they improve this, couldn’t it get to the point where your Pandora station obviates the need to buy the CD, because any time there’s something you like, you can easily add it and have it play with the frequency you want?

    At that point, maybe you listen to Pandora 2 hours a day, but you’re not buying CDs any more. If the music industry charges Pandora the same rate it charges radio stations, it’s lost 60% of its revenue.

  3. I’ve already stopped buying CDs, but that’s mainly due to Rhapsody.com, and not Pandora.com. But you’re right, Pandora gets me closer to listening to what I want to hear, but it still doesn’t meet play exactly what I want to hear requirements.

    But plenty of people are happy listening to the radio or Internet radio and they don’t buy CDs either.

    I’m not sure why businesses playing music over the Internet should pay greater royalties than business playing music over the airwaves or through XM/Sirius.

    The way I see it, there are three types of music distribution:

    1. For sale
    2. Subscription
    3. Broadcast

    I think each can justify a different kind of royalty payment arrangement.

    I think Pandora is still within the broadcast type. I don’t think any business that’s in the broadcast business should get penalized over any other business. Otherwise it would be like radio broadcasting would be getting subsidies.

    Jim

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