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Pandora’s Box

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Pandora’s CEO Brian McAndrews was featured in an article in Business Insider. McAndrews conjugates a story about a music industry executive that spoke to an undergraduate class of students at one of the top universities in the country. He never mentioned who the executive was or what university; to me the story was just that, a story.

The story consisted of the music industry executive asking a class of students who listened to terrestrial radio, Internet radio, and “on-demand” music services. Hands went up for terrestrial radio, even more went up for Internet radio, and nearly all hands went up for listening to “on-demand” music services. The next question the music industry executive asked was “how many of you pay for the on-demand service?” and no hands were raised.

We now live in a time where people do not listen to terrestrial radio. Terrestrial radio has become an aggravation to the listeners due to the commercials and the same songs being played in heavy rotations. Out of that aggravation satellite radio was born to answer the consumers wants. Just like McAndrews stated, I remember listening to the radio and the DJ’s that played the music. That is how I discovered new artists and musicians. The format is now broken and driven by major record labels and the money they shell out for airplay. If you don’t believe me; try to get an unknown artist airplay at your local radio station. Better yet, call your local radio station and request an older song from a popular artist and see if they break the rotation. Request lines are fake and an illusion to what’s really going on beyond closed doors of radio stations. Back in the day radio stations shelled out money, but there was a larger rotation.

McAndrews story is propaganda to mislead consumers and industry executives. Pandora is far from the hero in the real story. In fact Pandora uses the same kind of freemium business model that McAndrews is condemning and claims is killing the music industry. McAndrews and Pandora want to take control of the music industry and make industry executives believe that Pandora’s business model will restore the value of music. McAndrews only cares about raising the value of Pandora, a company that has 80 million subscribers and has yet to turn a profit.

Pandora has tried to diversify its profile by acquiring Next Big Sound and the concert ticket company TicketFly. They decided to purchase Rdio, which was a failed on-demand streaming service that filed bankruptcy. In my opinion Pandora buying Rdio is like shooting themselves in the foot.   McAndrews said that Rdio acquisition was apart of a broader plan to grown Pandora’s user base, therefore transforming Pandora. The vision is to be the go to destination for music, spanning on-demand music, steaming, live events, and much more. McAndrews was asked in an interview why buy instead of building in house. McAndrews said Pandora felt once they have determined its strategy the next step was to execute as quickly as they could by purchasing Rdio. The company is now able to leap frog over obstacles and mistakes. McAndrews admitted that Pandora could build its own on-demand streaming service, if they wanted to do so. Pandora only wanted Rdio’s technology and staff to help Pandora get to the next level. McAndrews calls Pandora’s market position a position of strength. McAndrews said that Pandora is the only service that monetizes the right way, Pandora has enormous amount of data at its disposal. Discovery, personalization, and effortlessness are the ways Pandora is building a platform that will offer consumers recordings and live music on demand.

I believe that McAndrews and Pandora’s shortcuts to build a mega platform for on demand music service are one of their biggest mistakes. Shortcuts and around about business strategies lead to pitfalls in business. Rdio was unable to succeed with their great technology, staff, and platform. So what makes Pandora think they can over come the obstacles and challenges that Rdio faced?

On December 21, 2015 Rdio sent a note to all subscribers stating that Rdio would be shutting down their service in less then 24 hours. The note from Rdio thanks the subscribers for supporting them for the last five years. It goes on to tell subscribers that Rdio and its staff look forward to bring subscribers a great listening experience in the future as apart of Pandora’s team.

I haven’t a clue what McAndrews thoughts are, Pandora spent millions of dollars to keep Rdio alive, only to fail. Pandora will spend millions trying to bring back Rdio or building a mega platform based around Rdio’s technology and staff. No matter what they do Pandora will face many obstacles along the way.

Pandora is trying to spark up deals with major labels to get a cheaper rate per stream or in fact a blanket license to soften the blow of royalty fees. However it has been estimated that Pandora will have to shell out tens of millions of dollars to start. More than likely major labels will demand equity shares in Pandora. Weeks after the interview McAndrews was trying to get the royalty rates dropped. Each song streamed through Pandora will now cost $0.0017 per stream instead of $0.0014 per stream on the free service, or $0.0023 per stream for premium subscribers. Pandora was initially pushing for $0.0011 and the music industry was pushing for $0.0025. These direct deals are nothing new. Pandora’s competitor Spotify has already had to deal with inflated fees demanded by major record labels.

Regardless of what happens, Rdio is just another victim to bad business strategies and a poor business model with little to no potential. Pandora wants fair ground, however they try to lowball artists and labels for years. Now with direct license deals major labels have and will demand inflated fees and prices that Pandora can’t possibly pay for. I don’t see much hope for Pandora and the other music streaming companies that share the same business models and strategies that Pandora does.

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