Yesterday, on Capitol Hill, the House Judiciary Committee held a hearing to discuss the Internet Radio Fairness Act, a bill largely backed by Pandora Media, Inc. and opposed by a growing number of musicians and songwriters. In fact, I recommend Chris Castle’s excellent synopsis of the message taken to The Hill by a handful of songwriters. If you want legal context for understanding the IRFA, I’ll direct you to Terry Hart’s Brief History of Webcaster Royalties, but if that’s more nitty and gritty than you want to know, consider this:
In defense of Pandora’s position that internet radio services should pay lower license fees to musicians and songwriters in the interest of “fairness,” you’re likely to encounter the bullet point that “Pandora isn’t even profitable yet,” conjuring an image of some fledgling, innovative enterprise trying desperately to survive within an outdated system. But as a guy who grew up around the motion picture industry, knowing something about the shenanigans of some producers, I know that literal profitability ain’t necessarily the same thing as everybody making buckets of money.
Keeping in mind that Pandora, like so many internet-based services, is basically a means by which software delivers a product that someone else has invested to produce, I had to wonder what kind of costs other than licensing Pandora has to cover while it is supposedly staggering toward profitability. Not surprisingly, according to the income statement on Yahoo Finance, the Operating Expenses shows two lines: R&D at a mere $130k and Selling General and Administrative at just over $249 million. This is from January 30, 2012 against revenue of just over $274 million. Presumably, the cost of licensing music is part of this second line item along with basic overhead like rents, servers, etc. But the rest is salaries and bonuses. What else do they have to pay for?
Now, when an ordinary entrepreneur thinks of a business that isn’t profitable yet, he thinks in terms of continually reinvesting in his business, keeping his own and any other founders’ salaries in check while growing that business and pouring in a ton of sweat equity. It just so happens that this is exactly what a songwriter, performer, or emerging new band does most of the time. But web entrepreneurs have a history of making money while losing value. Remember the Dot Com bubble? There was plenty of loss, but plenty of start-up founders also made out like bandits in the process. Failing with a few million in one’s pocket would be an artist’s dream because the nature of the work is so fickle, but I digress.
The top five executives at Pandora, not including founder Tim Westergren, earn combined salaries of just under $3 million, although CTO Thomas Conrad had exercised stock options of $5.9 million as of the January 30 report. Mr. Westergren is worth an estimated $100 million. According to Pandora’s own statements, it paid “50% of its revenue in fees” last year. Assuming this is true, that’s $137 million, plus the $3 million in top executive salaries, plus some unknown number to Tim Westergren, but let’s estimate that there’s at least $100 million or so left for other expenses, including the salaries of 530 employees. Divided evenly, which of course it is not, that would be annual salaries of over $180k per employee.
So, there is a world of difference between a company being profitable and those in the company making lots and lots and lots of money. If Pandora fails because, as it claims, the licensing fees are unfair, then many people involved with the company will walk away having failed upward. Meanwhile, it won’t take long for a new internet radio service to appear — one that can be profitable without exploiting the people and companies who make the real investments in the products that make radio function in the first place.
