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An epic battle in streaming music is about to begin, and only a few will survive – Quartz

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Others are convinced Pandora has a bright future. After all, plenty of young, fast-growing companies have lost money early on. Wedbush Securities analyst Michael Pachter argues that Pandora has a clear path to profitability: It pays most of its royalty costs on a per-stream basis, and so it can turn up the profits by simply increasing the number of ads it plays each hour, which would both generate more revenue and slightly reduce its royalty costs (because it’s playing more ads and slightly fewer songs overall).

Pandora could also use the information it has about its listeners to target them with ads specific to them, Pachter says. In theory, this should let it charge more for its ads than broadcast radio stations do. “Pandora’s leverage is not from exploiting the content guys, its from exploiting the advertising,” Pachter tells Quartz. “Old guys listen to Eric Clapton, they’re more likely to buy Viagra. They [Pandora] know that and they actually know who’s listening to what. Obviously they shouldn’t think old guys listen to Katy Perry and run a Viagra ad during that.”

Pandora has for a while now been tracking its users’ tastes to try and predict which ads would suit them. It has already launched targeted political advertising. (As the Wall Street Journal covered this news, “Pandora Thinks It Knows If You Are a Republican.”) So, during the upcoming US congressional midterm elections, listeners of country music might start to hear more Republican-themed ads, while listeners of classical music might hear ads for Democratic candidates. Evidently, investors think it could use the same method for corporate advertisers.

Pandora is one of the few successful mobile ad companies:

The elephants in the roomA clearer picture of what Apple and Google are trying to achieve in streaming music should emerge in coming months. But Rae, of the Future of Music Coalition, says that the odds are already stacked in their favor, and not just because they can absorb the high costs of royalties. The standalone services “are the services that are the most vulnerable, because they’ve got licensing costs and you also have got ISPs trying to put caps on users and the whole net neutrality issue,” he explains.

What this means is that, owing to changes in US regulation, content companies may soon be forced to pay internet service providers extra to stream audio and video content to users without annoying time lags. That would put even more pressure on their margins.

If so, the streaming music business (or at least the on-demand form) may well be destined to become a loss-leader for other, more lucrative business activities, Rae says. And it wouldn’t be the first time music has been used this way. Rae points out that in the days of CDs, retail electronics chains like Best Buy sold albums at a discount to get customers in the door so they would buy cameras and music players.

The tech giants already do something similar. Apple’s iTunes store, through which it sells albums for download, was for a long time a break-even business, designed to get people to buy iPods and iPhones, where the real profits lay; a streaming service will further serve that goal. Google tries to get people to use its services as much as possible so it can show them contextual ads. For Amazon, streaming music is just one more way to convince you to pay $100 a year for Prime, a way to lock customers into using Amazon for just about any product they buy.

Active vs passive listeningThe future of streaming also depends at least in part on whether people prefer to choose their own music (the Spotify model) or have choices made for them (the Pandora model). Back in the days of vinyl records and bakelite radio sets, everyone had a mix of both. Will it be the same in the internet era? Lefsetz, the industry analyst, thinks not. He wrote in his recent post that “we live in an on-demand world,” and so Pandora’s strength will diminish, though it will survive in some form. “There’s a market” for passive listening, he added, “[b]ut not run by algorithms, but people”—i.e., by radio stations, both traditional terrestrial ones, and digital ones, like SiriusXM.

That still remains to be seen, of course. And maybe Pandora’s Music Genome Project, which the company describes as “the most sophisticated taxonomy of musical information ever collected,” and involves more than a decade’s worth of analysis and classification of music by a team of trained musicologists, will turn out to have some value of its own as a piece of intellectual property, even if the radio-streaming model doesn’t.

I'm a little scared for the future of music.

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