The Contents of Pandora’s Box = $$$$

Posted by | March 29, 2010 | 5,049 views

Last week at SXSW I attended a panel on “How Will We Listen To Music in 2020” and a lot of the talk focused on the power of online streaming services. Alex Ljung CEO and founder of Soundcloud believed that all significant music consumption will come from online and will be streaming in the future and that “downloads are dead and downloads are stupid, ownership will be completely irrelevant”.

This rings true in a way for CTO of Pandora Tom Conrad who said at a recent workshop that the insight that started the idea for Pandora was “looking at how people consume music in the U.S. People listen to about 20 hours of music a week. It turns out that 17 hours of that 20 comes from radio” and if Pandora was going to compete with major players, “it needed to break free from confines of the PC”.

Pandora had come into struggles early on with proposed royalty hikes but thanks to a loyal fanbase and a thriving iPhone app, the Oakland-based company has come a long way from near bankruptcy. 2009 was the first year that Pandora made a profit, and a large one they did with $50 million in revenues. In statistics ending in February Pandora had 48 million registered users and 20 million on mobile.

In an interview with Digital Music News, Pandora founder Tim Westergren discussed how the company was doing and admitted their royalty costs to SoundExchange alone was $28 million, a figure which doesn’t include publishing. It was also reported last week that Pandora makes up 44-45% of total royalties for non-interactive streams. This is a huge chunk and should be good news to the music industry naysayers of streaming services.
“We’re a shade over 1 percent of the overall radio marketplace,” Westergren continued. “Multiply that by 100, and you get the found revenue flowing to labels and artists if we were in an internet radio world instead of a broadcast world”.

As much as it’s a far cry from the $40 or so billion the industry was used to a decade ago, $28 million in revenues from just one company is certainly something to look into. So what is such an influential company to do?

It will be interesting to see how next year fares for the company in terms of its scale; with growing popularity brings about higher royalties and if the ratio of paid subscribers does not rise with such costs then it could be troubling. However at the interactive part of the SXSW festival, at a workshop entitled “How Pandora Navigated the Smartphone Seas”, CTO Tom Conrad believed Pandora will generate more revenue from advertising than through a paid model. He stood firmly in their integrated advertising model, saying services gain 10 to 20 times more users if it offers a free version, but admitted they’re still fine-tuning the advertising dimension of the business.

On top of that, on Pandora’s blog, Westergren noted at a ‘town hall’ they put on in Seattle that “lots of folks have ONLY used it on a bluray, or a Sonos, or a iPod touch, etc. I really can’t wait to see the growth of devices in the home – we’re clearly beginning to hit an inflection point there” (http://blog.pandora.com/pandora/). The best way that Pandora will keep its subscribers is to offer it on as many devices as possible that looks to be obtainable in the near future.

Things are looking up for Pandora’s profile as a prospective deal was announced in January with Ford for music dashboard integration into cars. Having your own personal radio station come on as soon as your turn your car on seems like something that should have already been done and it’s good that someone is finally getting to it.

Out of all the touted new services lately, Pandora’s provides a simplistic user experience that doesn’t scare the non-digital natives. It provides an experience that can be passive or interactive depending on what the user is looking for, and is successfully getting the well-needed revenues for music labels. With 48 million users and 45% of online radio royalties the industry should be paying a bit more attention to this now powerful dark horse.

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Posted by on Mar 29 2010. Filed under Business Models. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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