FORTUNE -- There is a fundamental problem with Pandora Media's business model: the more its product is used, the more money it loses. That's the opposite of what makes a company viable in the long term. Nevertheless, the online music service is asking public shareholders to finance its growth so it can draw more listeners, increase usage and ... lose more money, presumably.
Despite this state of affairs, IPO investors are clamoring for shares, which are expected to hit the market on Wednesday. The company last week boosted its offering price range from $7-$9 to $10-$12. It also boosted the number of shares from 13.7 million to 14.7 million.
At $11 a share, the company would be valued at around $2 billion, or about 13 times sales. That number, though, is almost meaningless since Pandora itself expects revenue growth to decline, and losses are growing. Sales in the quarter ended April 30 were $51 million, a substantial increase over the $22 million Pandora took in a year earlier. The company lost more money in its most recent quarter than ever before -- about $6.8 million, compared to a $3 million loss in the year-earlier quarter. Pandora has never earned a profit, having racked up a total of $92.1 million in losses since it was founded in 200o.
Pandora is an excellent product. It streams music in "stations" programmed by listeners' own tastes, constantly tweaked by an algorithm. If you say you like a song, you'll hear more similar songs. Most often, it works remarkably well. Sadly, though, Pandora's business doesn't really fit in with how the music industry currently operates.
The trouble is the music royalties Pandora has to pay to music labels every time it streams a song. Those rates are higher than the advertising revenue Pandora collects. Every transaction is a money-loser. In its IPO filing, the company says it will continue to lose money through "at least" fiscal 2012. But there's nothing to indicate what might change in that time to turn around its current losses.
Its current royalty agreements expire in 2015. In its filing, Pandora says there is "no guarantee" that that it will be able to negotiate more favorable terms. More accurately, it's extremely unlikely that it will. Indeed, the rates could go even higher, which could force Pandora out of business altogether. Public investors are being asked to bet against long odds.
Making matters worse, revenue growth is actually slowing. Sales were 136% higher last year than the year before, but the growth rate is expected to slow as more of Pandora's business moves to mobile devices, where ad rates are lower than they are on the Web. Apple says Pandora is the second most-popular app ever for the iPhone. Competition, meanwhile, is growing as Apple (aapl), Google (goog), Amazon (amzn) and other companies are moving more deeply into the online music business.
Pandora now has about 90 million users (though only about 34 million of them use the service at least once a month.) The company boasts that a new user signs up every second. For most companies, that would be good news. For Pandora, it simply means more losses.