Pandora is getting into the terrible business of competing with Spotify

December 7, 2016, 11:55am

On-demand music streaming is a terrible business to be in. It’s crowded and unprofitable. But that’s not stopping Pandora.

The world’s largest internet radio service on Tuesday unveiled its latest offering: a Spotify-like on-demand product called Pandora Premium. It looks a lot like Rdio, the little-used but beloved streaming service that Pandora bought (for key assets) and shut down just over a year ago. It will cost $10 a month, like Apple Music and ad-free Spotify; there’s also a previously announced, limited $5-a-month subscription radio option that will arrive early next year.

The trouble with on-demand music streaming is that the way the music label contracts are set up, the economics don’t really make sense, and it’s an increasingly crowded field.

Spotify, by far the largest on-demand streaming service in the world with its 40 million paying subscribers, remains unprofitable. Apple Music also loses money, although Apple just announced it now has 20 million paying customers since launching a year and a half ago. Soundcloud just launched its own $10 monthly on-demand service, even as the company has been reportedly discussing a sale for the past few months. And then there are two offerings from Google (Play Music and YouTube Red) and Amazon Prime Music.

According to what CEO Tim Westergren reportedly told analysts, the goal for Pandora Premium is to have 11.3 million paying customers by 2020. But as long as multiple well-funded players are willing to lose money at $10 a month, it virtually guarantees that no one will make money in the near future.

These services spend a lot of money paying the major labels for music rights, which eats into their bottom line. Since they pay for each stream, the more users love a service, the less profitable it gets. For Spotify, renegotiating deals with the labels (some of whom are Spotify investors) has been a major hangup in its push for a 2017 IPO. The impetus for Apple, Amazon, and Google to get into a money-losing business like music streaming is that it’s another way to pull customers into their ecosystem of services so they can sell them other things, like iPhones and computers (Apple), and everything else (Amazon).

For years, Pandora, with its 78 million active listeners, has paid a different, lower-cost kind of royalty rate, because it provides a radio service, not on-demand streaming. But even that business has been rough; the company’s stock has fallen to $14 a pop since peaking at about $37 a share in February 2014. The company reportedly rejected a $15-a-share offer from the owner of SiriusXM over the summer, but the chatter about a sale has gotten increasingly louder.

Pandora emphasized to reporters at a Tuesday event that what will distinguish Pandora Premium from the pack is the reams of data the company has collected on listening habits. It probably won’t be enough to keep the ailing company independent.