Streaming Radio

There’s no question that Spotify has been an up-and-comer in the music streaming business. Speaking anecdotally, over time more and more of my friends and family members have been signing up for the service.

And now, Spotify is pushing forward with an even more aggressive growth strategy … and it’s not aiming low at all.

In fact, the company is seeking backers at an eye-popping valuation level of $5.3 billion.

And to top it off, the company’s co-founders (Daniel Ek and Martin Lorentzon) intend to raise the funds not through equity investment, but through loans.

It seems neither person wishes to give up any more of the company to investors than has already happened.

What makes the $5.3 billion valuation so startling is not just the amount – big though it is. It’s because that the last business valuation of Spotify, done less than 12 months ago, pegged the company’s value at just $3 billion.

That time around, a number of institutional investors stepped up to the plate (including Coca Cola, Fidelity and Goldman Sachs). But don’t look for more institutional investment in this round of funding.

In the case of Spotify, being second or third in the music streaming market segment has turned out to be a good thing. Pandora and others were the pioneers, laboring in the vineyards for many long years before proving out the business model.

Then along comes Spotify and cleans up in a market space that people now understand fully.

At the moment, Spotify has around 6 million paying users in 28 countries — along with several times that number of people who use Spotify’s free, ad-funded services. Spotify streams music across desktops and mobile devices along with other music gear.

The company reports that it pays approximately 70% of total revenues back to music rights-holders. It’s not profitable yet … but how many years was Pandora bleeding red ink? The better part of a decade, certainly.

There continues to be some low-level grumbling about how Spotify handles payouts to the “bigger name” performers in the music industry.

According to some reports, Spotify pays only about $0.005 per stream. That means only big stars (the likes of Beyoncé and others) can make any meaningful money from the service.

But for anyone who thinks that $5 billion+ is a tad rich when it comes to the valuation of a business property like Spotify … remember that Skype was sold to Microsoft for $8.5 billion in 2011, after having been valued at just $2.75 billion two short years before.

So maybe the whole thing isn’t so far-fetched after all.

Pandora® Internet radio is one of the more interesting concepts to hit the web. Built on a powerful music recommendation engine known as the Music Genome Project®, it enables a listener to hear streaming music selections chosen on the basis of the musical styles of their favorite bands, performers or songwriters.

If you enjoy the jazz piano style of Marian McPartland, for example, Pandora will stream performances in a similar vein – such as the songs of Beegie Adair and Joe Bushkin. And you can create numerous personalized channels (also called “custom radio stations”) focusing on different styles of music to suit whatever mood or occasion you wish.

It’s an approach to listening remindful of Tom Hanks’ famous quote about that box of chocolates in the movie Forrest Gump: “You never know what you’re going to get.”

… Except with Pandora, you do “kinda-sorta” know what you’re going to get. I’ve been a Pandora listener for over a year now, and I’ve been introduced to musical artists I didn’t know before and probably wouldn’t have stumbled upon otherwise … and I’m the richer for it.

Pandora may be an Internet star today, but it sure didn’t start out that way. The brainchild of Tim Westergren, Pandora labored under difficult circumstances for the better part of a decade. The Music Genome Project took years to build and calibrate, during which time Pandora’s yeomen developers were obliged to work for large stretches at a time without pay.

Also, as with many Internet sites, figuring out an effective business model was challenging — and a barrier to obtaining funding.

Then in 2007, just as Pandora seemed on the verge of breaking out, an action by the Copyright Royalty Board raised Internet radio royalty fees to prohibitive heights, resulting in a court action that was finally settled in July 2009 in a compromise ruling.

Through it all, Pandora managed to survive, and now is close to having 60 million registered users. The Internet site is attracting sufficient advertising dollars to bring in profitable quarters. Revenues topped $50 million in 2009 (~60% goes to paying music royalties), and revenues are on track to double this year.

Always innovating, Pandora is now expanding into TV sets and automobiles as well, although the majority of activity currently comes from computers and a significant minority from mobile phones.

Long-term, Pandora believes the biggest potential rests in automotive. Consider this: Once listeners realize they can simply skip over a song on Pandora they don’t like, it should change forever the way people interact with radio.