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Copyright, stocks, and the Pandora mystique

Pandora fans (and presumably Pandora) breathed a sigh of relief on Friday when a federal judge left the music streamer’s copyright tithe percentage unchanged. From back in 2011 through next year (2015) Pandora must fork over 1.85 percent of its revenue to ASCAP (the American Society of Composers, Authors and Publishers), which represent copyright holders. ASCAP had sued for more. Pandora wanted to pay less.

A stalemate of sorts, but there’s more litigation in the offing between Pandora and BMI. And then there’s the question of performance royalties, always a sticky wicket. These fees place a big question mark not only over the future of Pandora, but the entire online music streaming business.

“Pandora’s business model can’t and won’t work,” concludes Generator Research, a United Kingdom based industry assessment firm. It’s pretty simple says Generator: royalties eat up a huge percentage of the company’s advertising revenue, its biggest source of income. The service earns about $0.0072 per advertisement delivered to its listeners. Royalties account for $0.0046 per advertisement, or 63 percent of “ad revenue that is royalty.”

Generator Research

Generator Research

This means that Pandora operates with a much tighter cash flow than, say, Google, or even Sirius XM Satellite radio. Then there are streaming costs. Then there is the difficulty of effectively serving ads on mobile devices.

Bottom line: “Pandora is a really wonderful service, but it is very hard to see anything wonderful about the company’s business model, or even its future prospects if it carries on as it is,” concludes Generator Research’s Andrew Sheehy.

Despite this, Pandora’s stock continues to do well. Its shares jumped almost 150 percent over the last year; up almost a third this year.

“The bulls are hoping for a quick pop in Pandora Media,” noted the OptionMonster stock watching site yesterday. “The stock made an all-time high of $40.44 earlier this month before pulling back, so the bullish spread is looking for a quick rebound from the recent drop.”

Generator Research scratches its head at all this. The market has “not fully understood just how precarious Pandora’s business really is,” the company says, or thinks that Pandora will soon pull something new out of its sleeve.

I don’t pretend to understand this phenomenon. Maybe lots of people are relying on the “buy stock in things you love” wisdom. In any event, here’s hoping that love will find a way.

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