The Washington Post has an article on Pandora yesterday in which they say the company is close to going out of business...

Pandora is one of the nation's most popular Web radio services, with about 1 million listeners daily. Its Music Genome Project allows customers to create stations tailored to their own tastes. It is one of the 10 most popular applications for Apple's iPhone and attracts 40,000 new customers a day.

Yet the burgeoning company may be on the verge of collapse, according to its founder, and so may be others like it.

They go on to lay the blame on higher fees imposed on Internet Radio by the record labels...

Traditional radio pays nothing in performance royalties, though SoundExchange is pressing to change that. Satellite radio pays 6 or 7 percent of revenue. And then there are webcasters, which pay per song, per listener.

Using listener figures from Arbitron for XM Satellite Radio, it is possible to estimate that the company will pay about 1.6 cents per hour per listener when the new rates are fully adapted in 2010. By contrast, Web radio outlets will pay 2.91 cents per hour per listener.

I've talked about Pandora before (just this week in fact) and admitted I'm a huge fan of the service.  Beyond that, as a purchaser of digital music I have to say Pandora drives more of my music purchases than anything else. 

Bottom line: I think this is short sighted on the Record Label's part. 

That said, the Internet reaction to this news gives some important insight to why the labels have become so stubborn in regards to the net and I wanted to give a few examples to make that point.  First from Warner Crocker of Life on the Wicked Stage...

Well, call off the negotiating. I think Pandora should just pull the plug. Take $17 million off the table. Others should follow suit. Let the Sound Exchange explain that to its clients.

OK, let's look at this realistically.  The music business makes about $12 billion per year meaning the $17 million Pandora is paying is the equivalent of pocket change.  I can almost guarantee you they spend more on private jets in a year. 

I'm not endorsing the behavior but truthfully Internet Radio doesn't mean anything to the labels.  It's a situation where they have virtually nothing to lose and are empowered by that to squeeze as much profit out of the Internet as possible.  The question is, why are they squeezing so hard?

Which brings me to Michael Arrington of Techcrunch...

For now the labels want to squeeze more revenue out of Pandora and others. But when these companies start to go under and the bird in the hand disappears, they may regret their overly aggressive negotiating stance. It’s time for the labels to die, and anything that cuts off another revenue stream is at least partially good. I’m reluctantly willing to sacrifice Pandora if it quickens the inevitable march of recorded music towards free. Let’s just hope it doesn’t come to that.

Beyond the point above regarding how little Pandora means to the labels the truth of the matter is that record labels are seeing improved profits.  In particular, EMI is seeing great success since becoming privately held and making some much needed management cuts.

I've said this several times before but I'll happily repeat it: Record Labels make good money.  When they report losses it's almost always because of bad business decisions and poor expense management. 

So there's no way Pandora's death is going to bring about a revolution.  Which brings me to Steve Hodson of WinExtra...

The problem is that unless there are some late ditch efforts on behalf of webcasters like Pandora and even smaller providers they will find themselves being driven out of business. In the end though we are going to be the losers because as more and more legitimate ways to discover new music and easy ways to purchase that music in ways that doesn’t include the record label. What will happen is that there will be more and more piracy of music regardless of the efforts of crooked organizations like the RIAA – and that you can take to the bank.

The position Mr Hodson is taking basically says "Take Pandora away because I don't believe in any compromise".  The reason that's true is because the record labels can't divorce themselves from the process.  So when you say "easy ways to purchase that music in ways that doesn’t include the record label" you're saying there's no point in trying to reach a reasonable compromise on their end.

So this has been a long post but I wanted to lay these out for an important reason.   I think the record labels are being unreasonable here largely because of the public sentiment shown above.  If I'm a record label exec looking at those posts I'd certainly be tempted to write off the Internet market all together. 

Unreasonable behavior begets Unreasonable behavior.  Take the position of "all we want from you is to die" when talking about the record labels and you take away any incentive for them to compromise.  That in turn leads to a no mercy attitude towards the Internet which is exactly what we're seeing right now.

Bottom line, your contempt for them breeds their contempt for you and they have all the power which makes that situation bad for you.

Addendum: Based on a few e-mails I've gotten I wanted to post this link to a post I wrote about 6 months ago entitled "Why Record Labels aren't going anywhere".  If you think I'm wrong because the Record Labels are close to death I'd ask you to give me one more minute of your time to read it.