SoundExchange is a “performance rights organization” that collects royalties from service providers like Spotify, Pandora and Sirius Satellite Radio–and then distributes the royalties to artists. Here is a video explaining how the process works.
SoundExchange retains very little of its earnings, distributing virtually all of its income to artists, so it is effectively a mutual holding company owned by participating artists.
Here is a copy of SoundExchange’s financial statements:
Royalty receipts grew 30% from 2009 to 2010 and 20% from 2008 to 2009; expenses have barely increased. Participating artists are bringing home a lot more from SoundExchange every year. These amazing numbers are being posted while overall music industry sales seem to be in a permanent state of decline since the peak in 1997. (See an excellent Business Insider article on this here.)
People don’t BUY music so much anymore. They are listening online. Yet, as we have seen from Pandora’s latest earnings call, increasing listener hours ipso facto is NOT good for their business. Virtually all of the benefit goes to SoundExchange, the rentier. The SEC made note of this in its comments regarding Pandora’s S-1 filing:
“You currently operate under a business plan strongly reliant on lobbied concessions and federal court and federal agency consent decrees and settlements, setting reduced royalty and licensing rates that expire in 2015 and that ordinary rates, not subject to such extraordinary measures, to which you may be subject upon the expiration of these exceptions make your current business plan unsustainable, as discussed in your risk factors.”
If Pandora is doing shitty now, I can’t wait to see how it will do in 2015. All these people who own Pandora stock because they like the service don’t understand the economics of the situation they’re in. Maybe they have never played Monopoly. SoundExchange owns hotels on all the fucking property. Why would you ever want to go around the board in that case?
The best thing Pandora can do is LIQUIDATE the business now before it burns more shareholders’ money. It will never make a profit large enough to justify the current valuation. You have lots of online music radio apps competing for ad dollars (the last thing you want to be doing when you’re dealing with a powerful rentier), and I think Spotify is going to take the lead eventually. Just like virtually all online business, the winner will take everything. We live in an age where Facebook has the power to make or break business models (look at Zynga), and it makes no sense to fight the trend.
I covered my short P position under $11 and will gladly reshort once it gets overbought.
P.S. Tim Westergren still has not replied to my question on Quora about how Pandora plans to deal with Spotify. This is probably because they don’t have a plan.