The online world is buzzing over the news that Pandora radio is going public. After 11 years of operation, the company will offer $100 million in common stock, "as soon as practicable after the effective date of this Registration Statement," the audio streamer announced on its recent Security and Exchange Commission S-1 form.

This news is a major milestone in the history of Internet radio. Pandora says that it served 80 million registered users as of January 2011, and it signs up a new one every second. With 800,000 songs in its catalog, the Oakland, California company has cornered around half of all Internet radio listening among the top 20 online stations and networks in the United States, according to one survey.

"Since we launched the Pandora service in 2005, our listeners have created over 1.4 billion stations," the SEC document adds.

But despite revenue of $55.2 million in fiscal 2010 and $90.1 million in the nine months ended October 31, Pandora had respective net losses of $16.8 million and $0.3 million. And its statement is quite frank about the risks of a public venture, especially when it comes to copyright costs, competition, and advertising revenue.

"Internet radio is an emerging market and our current business and future prospects are difficult to evaluate," the disclosure warns. "The market for Internet radio has undergone rapid and dramatic changes in its relatively short history and is subject to significant challenges. As a result, the future revenue and income potential of our business is uncertain."

Here are some perils of being Pandora.

Royalties

Since Pandora began in 2000, the company has sometimes reported a profit. But it has also incurred huge operating losses and an accumulated deficit of $83.9 million.

"A key element of our strategy is to aggressively increase the number of listeners and listener hours to increase our market penetration," the S-1 statement notes. "However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses."

Back in 2009, Pandora was engaged in down-to-the-wire negotiations with SoundExchange, the entity that collects royalties on behalf of rightsholders. Keep in mind that federal law requires online streamers to pay royalties to both songwriters and performers, as opposed to over-the-air radio stations, who just pay the former.

With Pandora threatening to pull the plug and Congress getting involved, SoundExchange eventually agreed to terms that Pandora thought it could live with—"survivable royalty rates," as CEO Tim Westergren put it. But Pandora also announced that subscribers who listened to the service for more than 40 hours would now have to pay 99 cents a month.

"In essence, we're asking our heaviest users to put a dollar (well, almost a dollar) in the tip jar in any month in which they listen over 40 hours," Westergren explained.

The S-1 disclosure warns that Pandora is not out of the royalty woods yet. For the nine months ending on October 31, 2010, Pandora incurred "SoundExchange related content acquisition costs" to the tune of 45 percent of the company's total revenue for that time period:

To secure the rights to stream musical works embodied in sound recordings over the Internet, we obtain licenses from or for the benefit of copyright owners and pay royalties to copyright owners or their agents. Those who own copyrights in musical works are vigilant in protecting their rights and seek royalties that are very high in relation to the revenue that can be generated from the public performance of such works. There is no guarantee that the licenses available to us now will continue to be available in the future or that such licenses will be available at the royalty rates associated with the current licenses. If we are unable to secure and maintain rights to stream musical works or if we cannot do so on terms that are acceptable to us, our ability to stream music content to our listeners, and consequently our ability to attract and retain advertisers, will be adversely impacted.

The competition

As already noted, Pandora has cornered a huge chunk of the online music market. But the S-1 filing acknowledges that the field is fiercely competitive. Legal MP3 download services like iTunes are legion (to say nothing of the illegal sites). Then there's Last.fm, which is now charging for its mobile app service, Slacker Personal Radio, and Sirius XM. Overseas services such as Spotify could also make inroads into the US at some point in the future.

Meanwhile, terrestrial radio has been severely weakened by the broadband revolution but is still quite vibrant—in fact, the number of FM stations continues to grow. CBS and Clear Channel offer online services, such as iheartradio. And many terrestrial stations are being integrated into streaming meta-services like TuneIn radio.

But Pandora sees the biggest competition coming from less immediately obvious sources.

"In particular, if known incumbents in the digital media space such as Amazon, Apple, Facebook or Google choose to offer competing services, they may devote greater resources than we have available," Pandora warns. These competitors may enjoy a "more accelerated time frame for deployment and leverage their existing user base and proprietary technologies to provide products and services that our listeners and advertisers may view as superior."

Google

Finally, Pandora faces the same challenge as countless online entities—a reliance on Google for advertising revenue. Pandora depends on Google's DoubleClick service for ads. The S-1 statement acknowledges that Pandora can offer no guarantees that its DoubleClick deal will be extended on favorable terms following its expiration, or that Pandora could find an suitable alternative.

"Our agreement with DoubleClick also allows DoubleClick to terminate our relationship before the expiration of the agreement on the occurrence of certain events," the document notes, "including if DoubleClick determines that our use of its service could damage or cause injury to DoubleClick or reflect unfavorably on DoubleClick's reputation."

Some of these caveats come with a distinctly boilerplate tone—the obligatory warnings that you would expect a summary of this type to mention. But much of what Pandora has disclosed illuminates what a complex environment the online music/radio world has become.