Rdio Deal Is Admission That Pandora Business Model Is Unsustainable, Marks Beginning Of The End For Free Music Streaming

Headlines that Pandora purchased a bankrupt Rdio signal consolidation. But it's also a sign that even Pandora, the largest and most successful streaming music service, knows that its current business model is unsustainable.

Like Deezer's "delayed" IPO, Rdio's fire sale sell-off to Pandora signals that investors are cooling to freemium music streaming. But there's a deeper message: Pandora knows its days are numbered if doesn't move beyond free music quickly.

Apple also signaled that they understood the freemium music trap when they launched Apple Music's on demand streaming service with no ongoing free tier.

Rising Royalties

Now, Pandora is poised to do the same, also motivated by concerns that the royalties it pays are likely to go up. “It was our analysis that, if the CRB (Copyright Royalty Board outcome is unfavourable, the contribution margins we can expect over time from our ad-supported line of business will obviously decrease,” he said. “In this scenario, having other revenue streams to focus on such as subscription businesses and live events promotion gains importance.”

A restless music industry is ready for the shift. Publishers are pushing for higher royalties from all music streamers along with legislative changes that would allow them negotiate freely. Labels too are loosing patience, realizing that their investments in Spotify and elsewhere are riskier and any rewards farther away then they thought.

The End Of Free Music

The solution, according to many industry observers, is less free and ad supported music, so that more fans are encouraged to pay. The challenge is to not go so far that you drive people towards piracy or other forms of entertainment.

With the addition of a paid on demand streaming music service built on Rdio's elegant and user friendly platform along side free non-interactive streaming, Pandora hopes to strike the right balance.