Revenues are accelerating (Q1 2011 doubled year-to-year), but the company loses millions. It generates revenue, but its costs are automatically higher than the revenues they generate. It has a huge database, and millions of consumers access the database for free (plus it has a minor subscription service). It makes 87% of its money through selling advertising, and that advertising is displayed every time the database is accessed, but the company does not own the data, and the royalty cost for each access always exceeds the ad revenues it generates.
The company is Pandora, the database is music, and investors valued the company in this summer’s IPO at $235M.
Pandora’s current business model is unsustainable, according to the company’s own documents. In 2015, Pandora’s licensing fees are scheduled to rise around 40%. In a recent SEC filing Pandora admitted it is unsustainable without reduced fees. When asked what his biggest challenge was, Pandora founder Tim Westergren stated it is royalty rates, the licensing fees Pandora must pay on every song.