This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Spotify Has the Bad Business Model, Not Pandora

NEW YORK (TheStreet) -- Just to be clear, short-term I am a Pandora (P) bear. I explain why in Absolutely Horrible News For Pandora.

Long term, little has changed regarding my conviction.

I do have concern over how the royalty fight in Congress will play out; however, on the issue itself, Pandora is 100% correct. If sanity and fairness prevails, the company will see its content acquisition costs come more in line with cable and Sirius XM (SIRI) satellite radio.

It's time to demystify the royalty situation. Even people who know it inside out, explain it poorly or provide more information than necessary.

I compare Pandora and Spotify to help flesh out my argument that, contrary to popular perception, Pandora does not have the broken business model, Spotify does.

What is Pandora's General Royalty Situation?

Pandora abides by federal copyright law under the compulsory licensing provision. Pandora can play any song -- though it faces some limitations in how it serves music -- but must pay a per-song royalty set by a board.

What is Spotify's General Royalty Situation?

Spotify chooses to negotiate with record labels and artists directly. In other words, it cuts a bunch of separate deals as opposed to using an objective formula.

Both companies lose money -- and lots of it -- primarily because of the amount of money they pay for content acquisition.

Who Has the Better Deal?

It might not seem that way based on the media coverage, but Pandora does. It has a better deal, both from a business perspective and from the consumer/listener's perspective.

Pandora serves music from a much larger catalog than Spotify. Because Pandora licenses music via a standard and universal method, it can play anything. As such, it is able to play music from major artists/labels, but it has access to independent artists and labels. In fact, these relatively "unknown" acts make up the vast majority of Pandora's catalog.

If Pandora negotiated directly with labels and artists like Spotify does, its catalog would shrink exponentially. In fact, it would look a lot like traditional radio with much less variety. That's because it's literally impossible -- time- and cost-prohibitive -- to negotiate with thousands of tiny labels and artists directly. In fact, Pandora would not be able to find most of them to cut deals.

How Is Spotify Like Netflix?

Stock quotes in this article: P, NFLX 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,408.54 -16.31 -0.10%
S&P 500 1,864.85 +2.54 0.14%
NASDAQ 4,095.5160 +9.2910 0.23%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs