Earbits (YC W11) on Robert Scoble's Building43

Pandora relies on compulsory licenses provided by the government with royalty rates that are set by the copyright royalty board. Those rates, unlike royalties for publishing (which are a manageable percentage of revenue), are on a per stream basis and they are set too high. So, every single song you hear on Pandora costs them a fraction of a cent. It's one of the reasons why they limit your usage and have restrictions against skipping too often, etc.

Combined with other royalties, overhead and the low value of display ads on a radio site, it's next to impossible to turn a profit. And, the royalties are set to go up several times over the next few years.

Earbits is different because we license music directly from the copyright owners under our own agreement. Because we provide more value in the way of merchandising real estate, upcoming live performance information and other things that help the band (and label) build a sustainable "business" through their radio exposure, they give us certain royalty waivers and let us use the music in exciting ways to help drive awareness to the band. Our costs are lower and our service is more flexible as a result.

We have no ads, no commercials and no skipping restrictions. That being said, you'll only hear the music we have licenses for, but that hasn't stopped us from adding half a dozen Grammy winners and numerous headlining artists to our roster of 1700+ artists through 140 labels so far.

Pandora's problem is that they are locked into paying royalties on every song they stream. So as their listenership and total ad market increases, so do their costs. So far they've managed to scale their profits with the rising costs, but that might not be possible in the future. From their S-1:

SoundExchange, has consistently established royalty rates that would, if paid by us, consume an unsustainable percentage of our revenue. If we are unable to reach a new agreement with SoundExchange for the period after 2015, our operating costs may significantly increase, which could harm our financial condition and inhibit the implementation of our business plan. [http://www.sec.gov/Archives/edgar/data/1230276/0001193125111...]

Earbits instead makes new agreements with artists and labels which allow them to stream music without royalty costs in return for marketing the musician. The important difference is their focus on independent, and the fact that they aren't selling generic ads against the music.