How is Pandora so Bad at Business?

There’ve been a few articles posted in recent weeks* about Pandora’s music licensing fees. Most notably, a Pitchfork article wherein a band complains that they don’t make any money (a common enough grievance) and various references to the laws setting what those licensing fees must be. I’m curious about these numbers, so I decided to investigate further.

The important numbers are 21 cents, 7800 plays, and 50%. Pandora is forced to pay 50% of its revenue in licensing fees, and Galaxia 500s song netted them 21 cents for 7800 plays. This means they were paid an average of .00269 cents each time the song was played. They’re the songwriters, and the song was originally released in 1988, so the record company’s take on those royalties is presumably quite small (due to their contract not addressing future technology like digital distribution) or quite large (due to their contract not addressing future technology). Let’s still assume that the band is being screwed over though and that the net licensing fee is actually .0269 cents per song, with the record label taking 90% of that. This means that Pandora is collecting maybe as much as .0538 cents each time the song is played (on average).

Pandora makes their money from ad revenue and subscription fees. We’ll ignore the latter for now because I have no idea how to factor it into my calculations. (Plus, Wikipedia says that ads account for the vast majority of their income.)

Specifically, the calculations I did on how much money Pandora makes per ad. Pandora plays a LOT of ads compared to terrestrial radio (but they don’t have DJs, so it may be a wash). I sat down and ran Pandora for about an hour with all adblocking disabled and minimal interaction with the system. (i.e. I didn’t change the channel). Every time I viewed the screen (I was using the Android app), a visual ad was displayed; we’ll ignore those ads and hope they balance out the 12% of Pandora’s income that comes from subscriptions. During the hour that I listened I heard 14 songs and 4 ads for an average of 3.5 songs per commercial.

Let’s make some more assumptions, because we’re all about accuracy here. Let’s say that 90% of Pandora’s ads get blocked (although that number is probably diminishing, because they seem to be hosting the ads on their own domain now, making them much harder to block). This would result in a global average of 35 songs played per commercial. Multiply that by that .0538 cents from above, that means that Pandora is being paid 1.88 cents per advertisement successfully served. I feel like my assumptions have been generous, and that that’s a pretty high estimate.

Less than 2 cents. For one or more people guaranteed hearing an unskippable ad. TV ads start at $5 per 1000 viewers. That’s half a cent per potential viewer, never mind the ones that TiVo the ads, get a snack, etc. Radio advertising rates appear to be even higher!

So this leaves us with the question, how is Pandora so bad at business? How were they not able to negotiate better advertising rates? Their ads have a more captive audience. They have the ability to apply better metrics for targeting audiences. They’re certainly a large enough company to exploit these factors. Why have the negotiated such terrible contracts?

Cheezy petes! If you’re going to make advertising your primary income source, don’t give the advertisers free reign to not pay you anything! Raise your advertising rates. Play fewer ads. Tell Old Navy that if it takes 500 plays to sell one $10 sweater then it’s their fault for having a crappy ad.

Online advertising is terrible. If we’re gonna have to put up with this nonsense, can the people who sell the ads at least have the sense to get paid for it!

* “Recent weeks” meaning back in November when I first wrote this blog post. I... I may not be very timely with things.

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