Pandora Signs Deal with Sony: Balance Theorem and Game Theory
The expression of music has evolved alongside technological advancement. Before the appearance of recording devices, music was played and appreciated live; today, music can be preserved as sound-bytes that can be retrieved with a finger tap from a music app. Out of the infinite scores of music apps on the market, there are only several names that stand out: Spotify, Apple Music, and Pandora. While Spotify allows you to choose which song to play, Pandora, similar to a radio, streamed songs based on your predetermined preferences. As a result, Pandora and Spotify varied in their business models, so that they did not necessarily attract the same set of users. Recently, Pandora signed licensing deals with a number of music labels such as Sony and Universal Music. This deal will allow Pandora and its partners to expand on their current business models, creating a synergistic opportunity, and putting Pandora in competition with Spotify for attention. According to Tim Westergren, the CEO of Pandora, “This was a truly collaborative attempt to find a solution that would support artists while profitably growing our respective businesses.” Pandora’s recent endeavors allude to the principle of positive and negative relationships in balanced networks.
When constructing a network of different music companies one can assume that the companies are nodes with either positive or negative edges connecting them. Pandora and the companies that it signed deals with would have positive edges with each other, because they have friendly relations. On the other hand, a negative edge would connect Pandora with Spotify as they are direct competitors. Based on the Balance Theorem, either all three edges must be positive or it must have one positive edge and two negative edges in order to construct a balanced triangle. Because Pandora has a negative edge with Spotify and a positive edge with Sony, Spotify must have a negative edge with Sony in order to keep the network balanced. When one adds in more nodes, each representing either a company that signed with Pandora or a competitor like Apple music, one begins to notice a network in which there are clusters of nodes with positive edges with one another (companies under the licensing deal), but negative edges with nodes outside of that cluster (ie. competitors like Apple or Spotify).
While the relationships between the different music companies evidently follows the Balance Theorem, the decision of Pandora to sign with other companies could also be connected to game theory. If one were to think of Pandora’s options to sign or not sign, and its partner to sign or not sign, as their respective strategies, then creating contracts can be viewed as a game. This would be a coordination game where two sides work together to achieve a common goal, because the payoff would be higher if they chose the same strategy. In this way, the matrix would look like this:
If one company signs and the other one does not sign, then there is zero payoff for either. If both companies do not sign, then they might get a little payoff from their respective marketing efforts. On the other hand, the greatest payoff comes from Pandora and the Company signing together, and working towards a common goal. In this way, it is in both company’s best interest to sign with one another.
Source: http://www.digitalmusicnews.com/2016/09/13/pandora-deal-sony-umg/