Pandora's Royalty Costs Continue to Outgrow Revenue

On December 4, Pandora, the popular internet radio, reported its third quarter results for fiscal year 2013.

Pandora had 62.4 million active listeners by the end of November, an increase of 45 percent over the same period last year. Listener hours during November amounted to 1.27 billion, up 58 percent from November 2011. Revenue grew 60 percent to $120 million. An impressive number if only content acquisition costs had not grown 75 percent during the same time. Pandora’s royalty costs have outpaced revenue growth for six consecutive quarters now, a fact that doesn’t bode well for the company’s future. For the past quarter, Pandora reported a net profit of $2 million, but announced an expected loss for the running quarter.

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. The company is currently fighting for the Internet Radio Fairness Act (IRFA), which would lower the amount of royalties that Pandora and other internet radio services pay to artists in the United States. In 2012, Pandora spent $160,000 on lobbying, but its support for the IRFA has hurt the company’s reputation within the music industry, as artists and labels are naturally opposing the controversial legislation.

If the IRFA does not get passed and royalty rates remain as they are now, it is hard to see Pandora making a sizeable profit anytime soon, as content acquisition costs will continue to eat up whatever revenue the company generates.