In the NY Times Media Decoder blog yesterday, Ben Sisario argued that online music streaming services like Pandora and Spotify can’t make a profit because they have to use a large portion of the revenue listeners pay them to… pay for the music. Gee, they actually have to pay for what they are reselling. How unfair is that?
Pandora pays the statutory rate (legally established by Congress). Since Spotify negotiate privately with record companies, Sisario acknowledges that no one knows what Spotify pays. Yet he still finds this unknown amount to be too high.
On what basis, then, does he make this claim? Well, neither company is making a profit yet. Yes that’s right. These two Internet startups are not profitable, just like a lot of Internet start-ups, including Facebook.
Should they work on getting more advertising? Grow the service by getting more subscribers? Or at least look at other costs as well? No, the solution is simply that “music is still expensive”.
Actually music is dirt cheap, thanks in part to iTunes, which started selling songs for 99 cents so they could sell iPods. In 1965 a new Beatles album cost about $5. That’s about $35 now.
The statutory rate, which Pandora pays, is a complicated formula which is explained here.
The basis of the payout is that it can never be more than a certain percentage of the service’s revenue. Here is a company that is guaranteed never to have to pay more for its raw materials than a percentage of its revenue. Sounds like a pretty idiot-proof business model. But like the London Olympics Committee, maybe Sisario thinks artists and record companies should just be grateful to get exposure and aren’t entitled to be paid.
If Spotify or Pandora can’t improve its profitability and fails, then another company will come along with better execution. Then again, I hear the NY Times is struggling to stay alive. Maybe the problem is the cost of all those “expensive” writers like Sisario.