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The Box is Opened and the Results are not Good

August 30, 2012

Today’s chart shows the year-over-year growth of Pandora’s revenue and content acquisition costs for the past six quarters.

Yesterday we asked the question whether music streaming would ever be a profitable business. Pandora’s second quarter results, announced yesterday after market close, suggest that the road to profitability will be rocky for one of America’s most popular online radio services.

Pandora’s user base grew 48 percent year-over-year and the time users actually spent listening increased by 80 percent. Revenue grew 51 percent to $101 million, but as content acquisition costs grew 79 percent, Pandora once again failed to turn a profit. Pandora’s royalty costs have been outpacing revenue growth for five consecutive quarters now, a fact that doesn’t bode well for the company’s future.

Pandora currently licenses music under the compulsory licensing provision of federal copyright law, which allows it to use any song but leads to royalty costs growing almost linearly with increasing listening hours. If Pandora wants to make its business work in the long run, it might have to negotiate with record companies individually. Otherwise, content acquisition costs will continue to eat up whatever revenue the company generates.




From → business, Strategy

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