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So What’s in Pandora’s Box?

August 29, 2012

Porter’s Five Competitive Forces in action. The Bargaining Power of Suppliers is a major threat to the streaming music providers in spite of their increasing popularity. Services such as Pandora and Spotify have millions of users across the globe and as the growth of music download revenues is flattening out, streaming is expected to be the main growth driver of digital music in the next few years.

Spotify and Pandora are perhaps the most popular streaming services out there and their revenue growth reflects the growing acceptance of streaming as opposed to owning musical content.

Both companies reported revenues of well over $200 million in the past year and yet both companies are having trouble making a profit. Spotify’s net loss grew from $26 million in 2009 to almost $57 million in 2011 and Pandora’s numbers don’t look much better. Later today, Pandora will report its second quarter results for fiscal year 2013, and one can only hope that the bottom line looks better than it did in the first quarter. (Pandora reported a net loss of $20 million for the quarter ending April 30)

Although both companies have different business models, the problem they are facing is basically the same:  the high cost of music royalties. In fiscal 2012 (Pandora’s fiscal year ends in January), Pandora paid $149 million, or 54 percent of its revenue for “content acquisition”. Spotify’s CEO Daniel Ek recently said that in its history his company paid 70 percent of its income back to the industry.

These numbers show that the music industry might have to lower its demands if it doesn’t want to lose the growing revenue it’s generating from streaming royalties in its entirety.



From → business, Strategy

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