CoinsInHand

Despite struggling to maintain profitability, Pandora has largely avoided the negative backlash that its IPO classmates Groupon and Zynga have endured. I chalked it up to the fact that Pandora is simply older than the other two. Launched seven years ago, Pandora has grown surely and steadily over the years rather than through out-of-control, hard-to-manage spikes. That, and it’s pretty much the only online music startup to make it this far. That should count for something.

And yet there is one similarity between Pandora and Groupon and Zynga, besides their hyped up 2011 IPOs: They are each the pioneers and leaders of a new category of businesses. And no one can say for sure whether any of the categories — daily deals, casual gaming, or Internet radio — are legit, sustainable businesses at all.

On today’s earning call, Pandora discussed the minutia of integrating itself into radio ad buying platforms, ad pricing on desktop versus mobile, and its successes at being implemented in cars made by Honda. The company significantly lowered its earnings expectations for next quarter, blaming low confidence in advertisers on account of the fiscal cliff. Shares went spiraling downward by 18 percent in after hours trading. The outlook is not positive.

The thing is, none of that really matters if the company can’t get its royalty costs down, which is not just a Pandora problem, but an Internet radio problem.

Pandora has been fighting a for years over its royalty fees. The argument has gotten much noisier in recent weeks on account of Pandora’s testimony over the Internet Radio Fairness Act last week. The act will require satellite and cable radio stations to have to pay the comparable royalty fees to SoundExchange as Pandora. The hope is that rights holders will get more money from sources other than just Pandora and stop seeing this small Internet radio company (which now claims around 7 percent of total radio listening) as the enemy.

But in the weeks leading up to this hearing, it seems every artist, blogger, songwriter and person with an opinion has weighed in via blog posts that Pandora and Spotify were killing the industry with their low payments. People like Linda Perry, who writes songs like “Beautiful” by Christina Aguilera, complain they are paid a pittance by Pandora, portrayed as a parasite trying to squeeze more money out of them. (Note: a songwriter isn’t the only one who owns the rights to a song and gets paid out in these instances.) Big artists like Rihanna, Missy Elliott and Billy Joel argue that the Internet Fairness Act will cut the amount of royalties they get by 85 percent.

Ignoring Spotify for the purposes of this discussion, the argument is curious to me because Pandora is providing new income that the rights holders were previously not getting from radio stations. It’s quite a stretch to say that Pandora listeners would otherwise be buying the music they’re streaming on Pandora. No, they’d probably be listening to the radio, which pays rights holders nothing for the privilege of having their songs distributed there.

On the call today, Pandora CEO Joe Kennedy said the testimony was encouraging. “We’re well aware there’s no assurance that any bill will be passed, but to get it in consideration of key people in congress is a good first step in our view,” he said. He made Pandora’s plea again, too: “There is no country where the entire radio industry [including online, satellite and terrestrial] pays a total combined amount of even close to what we as single company will pay this year.”

And yet, the music industry’s arguments are gaining steam, no matter how many smaller artists Pandora trots out to testify in its own favor. Meanwhile, the company is under pressure to prove out its model to investors. And they are losing patience.

[Image Credit: neeravbhatt on Flickr]