A few years ago, if I remember correctly, Netflix and Pandora occupied roughly similar places in Wall Street’s imagination, each in its respective industry. Pandora was the public play on the bright future of music streaming, and Netflix was the public play on the bright future of video streaming. Fast forward to 2015 and Netflix has a market cap near $50 billion, while Pandora is the subject of articles with headlines like this:

Losses point to bleak future for music streaming services

By way of explanation for the problems of the music streaming services, the article quotes one venture capitalist saying, “As a streaming platform, your relative value is nil, because you don’t own the content.”  But Netflix doesn’t own most of its content, and that apparently hasn’t stopped it.

I’m sure there are many reasons why Netflix has gone one way while Pandora and its brethren have gone another, but one that is perhaps underappreciated is the question of fixed costs,  a simple structural factor that was present at the creation of both companies.  Netflix licenses most of its content for a fixed fee that does not vary per subscriber or per viewing, so as it has grown it is paying less on a per-subscriber basis for a given unit of content. This has allowed it to invest in more content, and eventually it should (the stock market is saying) allow it to earn high margins for shareholders as well. The music streaming services, on the other hand, pay per-listen royalties for their content, so their main costs are highly variable and it’s much harder for any one player to get any scale advantage, even if the industry grows and/or royalty rates trend lower over time.

I’m not sure why one type of copyrighted content is licensed one way and another type is licensed another. But whatever the reason, this simple distinction doesn’t seem to be emphasized, even though it may well lead to a company like Pandora growing its way into bankruptcy.