In December 2012, Music lovers tuned into Pandora, the Internet radio service, and it set the following records:
- 1.4 billion listener hours -- up 54% compared with the prior year.
- 67 million active listeners -- rose 41% for the month.
- Pandora members collectively listened to the equivalent of more than 5,692 years of music on December 24, 2012.
During the holidays, 31% of people in the West preferred new holiday tracks compared with classics. Midwest listeners were the earliest adopters of holiday music. Some 52% of people in the Northeast care about music more than food at holiday parties, compared with other regions across the U.S.
There are 67 million U.S. users, listening about 20 hours per month. One million are paid subscribers.
The company is on track to generate between $422 million and $425 million in revenue in 2013, according to estimates. Pandora CRO John Trimble said the Chrysler Group recently joined the extensive roster of automotive brands to integrate Pandora into its vehicle, making it the 20th automotive brand partner.
The service generates revenue from audio and visual ads, tapping into a wide audience across desktop and mobile, from cars to tablets and smartphones. Brands also run promotions to sponsor 30-day trials, Trimble said. Ads get targeted through signals from the member's registration data, such as gender, age, genre, and location. Pandora doesn't use services from companies like Triton Digital, which teamed with eXelate to target in-stream audio ads to digital radio listeners.
Pandora, spawned from the Music Genome Project, a DNA map for each musical piece, relies on word of mouth marketing, email, advertising within the music service to listeners, search engine optimization and social.
COMMENTARY: Listening and sharing music online couldn't be more convenient or crowded. Options are easily found at the swipe of a finger or click of a mouse: the algorithm, Pandora's radio-style personalized music streaming; Spotify's social-sharing streaming platform; iTunes $1.00 per download music model for Apple-only devices and the cloud-based music downloading services of Amazon and Google on almost every other device. Then there are the smaller streaming and subscription players: Rhapsody (who has missed the social boat so far), Slacker, Rdio, MOG and more. Or, there is straight-up piracy.
There are essentially three business models for online music right now:
- Ad-Supported Revenue Model - Advertisements running before download -- a highly scable business model, but a costly and money losing revenue model.
- Subscription-Based Revenue Model - A fixed monthly or annual charge for an unlimited number of music streaming downloads -- a more viability long term strategy for sustainable and predictable revenues.
- Mixed Revenue Model - Includes both elements of the ad-supported and subscription-based revenue models.
What complicates the issue further is unique to the music industry:
- Too Much Competition - Too many separate, competing interests fighting for a piece of the music streaming pie.
- Costly Royalty Deals - Music labels, music publishers, and artists themselves (to a much lesser extent) all have certain terms in their favor including most favored nation, minimum payments, per-play costs, percent of total company revenue, and one of the most head-scratching, detailed reporting of the competition.
It's difficult to make a profit in the music streaming industry as you can see from the revenue and net loss comparisons between Pandora and Spotify:
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The problem: The high cost of music content. Although Pandora and Spotify are rapidly growing revenues, the cost that they pay the music companies for all that content is rising faster than revenues are growing, and neither company can seem to make a profit from all their efforts, as you can see from Pandora's content costs and revenue growth.
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As a result of Pandora's high content costs, it continually operates below the breakeven point, with expenses very often exceeding revenues.
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It makes you wonder whether there is an optimal revenue model for music streaming companies like Pandora and Spotify. Although Spotify active users reached 20 million in December 2012, of which 20% or five million were paid subscribers (nearly five times Pandora's 1 million paid subscribers), offering unlimited downloads to those paid subscribers comes at a higher cost -- higher royalties to the music companies and no advertising (no ads appear for paid subscribers).
Spotify Losses Mount
Spotify will likely pass the $500 million revenue mark for 2012, more than double that of 2011's $244 million, and with losses still on the books the company is expected to seek a new round of funding, money that will value the company at more than $3 billion.
Pandora's Red Ink Continues
Pandora also expects to lose money in 2012. Like Spotify, Pandora has never generated a profit. For the first nine months of fiscal year endng January 31, 2013, the company generated total revenues of $302.056 million and a net loss of $23.59 million. For Q4 2013, Pandora expects revenues to be in the range of $120 million to $123 million. This would bring total revenues for the fiscal year ending January 31, 2013 to $422 million to $425 million. Non-GAAP loss per share is expected to be between ($0.06) and ($0.09). Non-GAAP loss per share excludes stock-based compensation expense, assumes minimal tax expense given our net operating loss position, and 171 million weighted average basic shares outstanding for the fourth quarter fiscal 2013.
Pandora Increases Listening Hours
For the third quarter ending October 31, 2012, users logged 3.56 billion listener hours, 67% over the same quarter the prior fiscal year. Active users reach 59.2 million growing 47% year-over-year. This averages to about 19.73 million active users per month for the quarter.
According to J.P. Morgan, 70% of Pandora's users will be listening to their music via a mobile device (see below) during the fiscal year ending January 31, 2013. Like Facebook, this means that Pandora must shift its advertising focus from the desktop to mobile devices. For its part, Pandora has generated more listener hours, but it must pay the music companies each time a song is streamed. 95% or 18.73 million of Pandora's active users are non-payers (only 1 million are paid subscribers). Paid subscribers during the first nine months of the current fiscal year represent only 11% of total revenues.
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Pandora's Music Royalty Paradox
How much should "free" music cost and who should pay for it?
That's the deceptively simple question at the heart of the latest round of legal wrangling surrounding Pandora, which has launched an effort to get federal legislation passed to lower royalty rates paid to musicians so that it may remain competitive.
In response, more than 100 artists, including high-profile acts like Rihanna, Pink Floyd and Katy Perry, have signed an open letter opposing the move. The letter states.
"Pandora's principal asset is the music. Why is the company asking Congress once again to step in and gut the royalties that thousands of musicians rely upon? That's not fair and that's not how partners work together."
Pandora argues that Internet radio royalty fees should be in line with those of other services, such as cable and satellite radio. According to the company, it paid 54 percent of its revenue to record companies and artists last year. By comparison, Sirius satellite radio paid 8 percent. Pandora, however, agreed in 2007 with the artists' and labels' representative organization to its royalty rate.
Conclusion
Pandora, like Spotify, is treading water, with a revenue model that cannot be sustained over the long-term, and the company must either charge more for its music streaming, obtain royalty concessions from the music companies, or modify its advertising products to satisfy mobile listeners while generating more mobile adverting revenues.
According to Pandora's fourth-quarter financial report, 90 percent of its revenue comes from pop-up and audio advertising, which in the online world not only tends to drive away users (in many cases, to music pirating outlets) but have yet to prove effective, especially as more users shift to mobile devices.
Dave Allen, founding member and bass player for the bands Gang of Four and Shriekback, who blogs frequently about developments on the digital music front says.
"Mobile advertising is not taking off for many reasons so, like Facebook, Pandora is struggling to make any sizable revenue from mobile ads."
Courtesy of an article dated January 11, 2013 appearing in MediaPost Publications Online Media Daily, an article dated January 18, 2013 appearing in WebProNews, an article dated November 12, 2012 appearing in The Blog Herald and a press release dated December 4, 2012 issued by Pandora, and an article dated December 5, 2012 appearing in eCommerce Times and an article dated November 29, 2012 appearing in SFGate.com
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