The eternal Beta: Pandora's Business Model Design


Originally uploaded by Alex Osterwalder.

I'm a regular user of Pandora.com, which is a customized Internet-based radio station that plays songs based on your initial preferences. The whole thing is based on what they call the "music genome project". Songs are coded according to their characteristics. This means that based on the songs you prefer an algorithm will play new songs with similar characteristics. It's actually quite interesting and I have discovered some new artists I hadn't known, but now really appreciate...

However, the last few days I noticed a change: Pandora now allows me to bookmark songs I really like and even purchase them directly through Amazon.com or iTunes. This is actually interesting because it represents a quite important tweak in Pandora's business model. Whereas, a few months ago Pandora had no visible sign of a revenue model (and de facto no real business model) they now earn money from commissions when listeneres buy songs on Amazon or iTunes.

To me this looks a little bit like a Beta-business model that was introduced early to the market despite deficiencies (no revenue streams...), but is now changing towards something that works from a business point of view.

However, let's do some simple calculations... What if:

* Pandora had 1 Mio listeners
* On average 10 songs are played per listener per week
* Pandora has to pay 0.1 cent per song to the copyright owner
* On average 10% of customers buy a song each week
* Pandora earns 10% commission on a price of 99 cent per song

Cost per week:
Listeners*songs listened*cost per song
1'000'000 *10*.001=1'000.- USD

So this was Pandora's business model before introducing a revenue stream. Losing 1'000.- USD per week on 1 Mio listeners. But since there is now revenue sharing with Amazon.com and iTunes we have to add the following calculations:

Revenue per week:
Listeners*purchased songs*commission
1'000'000 *0.1*.099=990.- USD

Conclusion: This would mean 10.- USD loss without counting operating costs, such as server farms etc. Hmmm. I hope Pandora has negotiated a better deal with record companies to play songs at a cheaper rate and has stroke a better deal regarding revenue sharing with Amazon/iTunes. Also, once the former is a given I hope Pandor can dramatically grow its user base and their consumption pattern. Otherwise they will earn nothing but peanuts and probably not be able to cover their costs...