Pandora has been operating for over a decade, so the filing of its IPO on Friday doesn’t immediately change the media landscape, except that the Internet radio company will have more money to fund growth once the stock sale closes. But it does sound a wake-up call to broadcasters – especially those who have been complacent about Internet streaming.
Pandora’s business plan is, quite simply, to take marketshare from AM and FM stations, both in listeners and advertisers. Here is part of how Pandora explains its business to potential stock buyers:
“How We Are Redefining Radio
Radio has accounted for approximately 80% of audio entertainment listening hours every year from 2002 to 2009, according to the Veronis Suhler Stevenson, or VSS, Communications Industry Forecasts, 22 and 24 Editions. In addition, in 2009, listeners averaged 13 hours per week of audio entertainment listening on the radio, compared to approximately three hours per week for owned recorded music on formats such as CDs or MP3s, according to VSS. We are redefining radio from the traditional one-to-many programming of broadcast radio to a truly personalized one-to-one radio listening experience. We believe the following competitive strengths will help us realize the potential of our opportunity:
We Enable Personalization and Discovery. Unlike traditional radio stations that broadcast the same content at the same time to all of their listeners, we enable each of our listeners to create up to 100 personalized stations. We believe the promotion of music discovery is one of the reasons why radio has endured as the most popular way to listen to music and that our personalized playlist generating system more effectively introduces listeners to music they will love.
We Listen to Our Listeners. We continue to build a highly-recognized brand by providing a high quality service. We believe the greatest contributor to our growth has been our passionate listeners sharing their positive experiences with their friends, families and other music fans.
Pandora has grown primarily by word-of-mouth, and as a result, we have been able to build our brand with relatively low marketing costs.
We’ve Pioneered a Personalized Playlist Generating System. Our proprietary personalized playlist generating system enables us to predict listener music preferences and stream music content that is tailored to individual music tastes.
• Genotyping Music. Our music analysts measure up to 480 attributes per song that collectively capture a song’s musical attributes – everything from melody, harmony and instrumentation to rhythm, vocals and lyrics.
• Leveraging Individual and Collective Feedback. While listening to a station, our listeners provide feedback by selecting a thumbs-up (I like this song) or a thumbs-down (I don’t like this song). These “thumbs” teach us more about our listeners’ preferences and we use them to adapt and improve the playlist for each listener in real-time. In 2010, we received an aggregate of over three billion thumbs, and since the launch of our service we have collected over eight billion thumbs.
• Developing and Refining Playlist Generating Algorithms. We have developed, and continue to refine, complex mathematical algorithms that combine the musical analysis from the Music Genome Project with the individual and collective feedback we receive from our listeners to predict music preferences and generate personalized playlists.
Building Our Catalog. We add thousands of songs per month to the Music Genome Project based on music selected by our curators, feedback from our listeners and independent submissions by artists. Our vast catalog of songs represent nearly every recorded musical genre, from classical, jazz, rock, pop and hip hop to post punk, Celtic and flamenco.
We’ve Built a Multi-Channel Distribution Ecosystem. We work closely with our distribution partners, including manufacturers of smartphones, consumer electronics products and automotive sound systems, so that our listeners can enjoy personalized radio anytime, anywhere.”
Pandora’s business plan is not without challenges, the prospectus acknowledges. Its biggest expense, far and away, is paying SoundExchange for music performance rights. That claimed 45% of revenues for the first nine months of the current fiscal year. The company was nearly put out of business by the original fee schedule set by the Copyright Royalty Board until Congress intervened with the Webcaster Settlement Acts of 2008 and 2009, which allowed Pandora and other Internet broadcasters to negotiate lower fees. The current deal expires at the end of 2015 and Pandora can’t predict what the performance rights fees will be after that. Pandora also pays music royalties to ASCAP, BMI and SESAC, but those claim only 4% of its revenues.
As far as competition is concerned, Pandora notes that it faces lots. It lists radio broadcasters, online advertising competition from Google, Facebook and others, and even competition for media usage from television. It appears, though, that what Pandora management fears most is that some bigger tech company, such as Amazon, Apple, Facebook or Google, might decide to build a direct competitor to its online audio business. Should that happen, “they may devote greater resources than we have available, have 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,” the IPO filing stated.
RBR-TVBR observation: Pandora proudly proclaims that its music library contains over 800,000 songs from over 80,000 artists – but fails to mention that it doesn’t have exclusive rights to a single one of them. The company’s great weakness is that it has no unique content whatsoever. None. Zippo.
But management appears to understand that and is looking to add sports, talk, news “and other forms of content beyond music.” So it is vulnerable on the content side, which is where existing broadcasters have a big advantage in taking their content to the Internet, and it is vulnerable to someone creating a better music selection algorithm, just as Alta Vista fell victim to a little start-up search engine called Google.
Regardless of whether Pandora becomes a major media player for decades to come, or proves to be the next MySpace, someone will get the Internet radio business model right eventually.
Mobile broadband is here and, while still in its infancy, is growing fast. Internet audio in the car dash will soon be commonplace, so AM, FM and satellite radio operators must be there to compete with the new players.
Established broadcasters have the advantages of identifiable brands, established sales forces and the ability to create unique and desirable content. But those advantages don’t help if you don’t jump into the game and compete in the new Web-based audio marketplace.
Multiple channels, instant interactivity with listeners and world-wide coverage make the Internet an exciting new frontier for radio. Big radio groups like Clear Channel and CBS Radio are already very active, as are lots of smaller broadcasters. If you are not, you’d better get to work on your Internet radio strategy – post-haste.
