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Internet radio service Pandora continues to expand, but challenges still lie ahead

Pandora has been in existence around 10 years and continues to fight for control of online music in a continually evolving industry.  It seemed unlikely the small Pandora staff would be able to help the company avoid closing down at any minute -- an issue that has been left behind.

The popular online service has almost 60 million registered users, and includes 500 simultaneous ads playing to music listeners.  

"In the last year, I feel like we've finally cracked the nut on how to effectively monetize a streaming radio service," said Tim Westergren, Pandora founder, in a statement to Reuters.  "Our intention is to build a radio business that looks a lot like the traditional radio business, with a scalable mechanism for selling national and local advertising so we can do everything from big, branded national campaigns to local pizza joint specials. They can be delivered as graphic ads, as audio ads, as video ads. We're pitching big ad agencies who have historically bought broadcast radio and pitching them to shift that money to the Web."

I've had the chance to chat with Tim a few times in the past, and there is something that's evident:  he loves what he does.  There was great concern Pandora wouldn't be able to survive after the controversial Copyright Royalty Board (CRB) announcement in March 2007.  Since then, Pandora faced questions regarding survival for the next two years, with some analysts especially concerned regarding the higher royalties Pandora has to pay.

As it currently stands, Pandora must pay royalties for every song played and for each listener who listens to the song.  The company also can pay 25 percent of all collected revenue, with copyright groups securing the higher figure.  Pandora executives worked with SoundExchange to find a fair solution, and the company has seen recent success.

Around 70 of its current 190-person employee list joined in 2009, and Westergren hopes to recruit another 70 employees before the end of 2010.  Although its main office is in Oakland, Calif., Pandora also has locations in New York City, Chicago, Los Angeles, and Dallas.

Even though things are looking better -- $30 million of Pandora's estimated $50 million in revenue went to royalties -- which is an issue that Pandora hopes to work on in the future.

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Why the Difference?
By Briliu on 7/14/2010 1:33:02 PM , Rating: 3
I'm confused as to why Pandora has to pay different royalties than a regular radio station does.

My personal theory on it is they have to because they can discretely quantize their user base and therefore must be charged for it. Which, IMO, is insanity.

Has this been adequately explained elsewhere?

RE: Why the Difference?
By bigdawg1988 on 7/14/2010 7:53:12 PM , Rating: 2
Actually, it's because the record companies don't want to pay every artist that deserves it! Otherwise, the little record companies, radio stations, and distributors might start to get a bigger piece of the pie and ruin it for the big companies. See article below, it explains it a lot better.
I really like Pandora. I hope they make it. I can barely listen to broadcast radio, it's so pathetic. the article explains why.

RE: Why the Difference?
By SunAngel on 7/19/2010 12:55:08 PM , Rating: 2
My belief? Pandora has absolutely zero bargaining power. The do not make nor create any of the core services (i.e. music). They do nothing more than repackage the content into another form.

The record companies understand this and 'strong arm' Pandora, which in my opionion is fair but it sucks for them. I don't know how you can begin to quantitize revenue from advertising let alone control demand from users when everything they do is solely dependent on the quality/quantity of someone elses work.

They are at the mercy of the record companies and rightfully so.

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