Pandora Media Case Study
Pandora went public in July 2011. Since initiation, stock price has been extremely volatile and steadily declined (see appendices 3). Pandora’s impressive $101 million revenue is mainly derived from advertising and paying subscribers, but due to expensive music royalty rules, Pandora is struggling to be profitable. As of July 31, 2012, Pandora had 150 million registered users, 54.9 of them active listeners. 1 Despite Pandora’s strong brand name in the United States, it is increasingly vulnerable as several other online music competitors are entering the market. Pandora, like most other “freemium” Internet businesses, is struggling to monetize by not being able to convert adequate amounts of free users to subscribers, and face challenges from the increase in cheaper mobile advertising. Pandora’s ability to achieve and sustain profitability and operating leverage depends on the ability to increase revenue per hour of streaming through increased advertising sales across all delivery platforms, developing new sources of income and through added subscribers. This business plan suggests that Pandora’s profit and sustainability will improve through further refining advertising options, expanding subscription revenue opportunities, generating profitable partnerships with artists, wireless carriers and other online businesses, and exploring the option of merchandise.
Pandora’s vision is to be the global leading online Internet radio service and to have billions of listeners all over the world. 2 Pandora’s dream is to be widely available in all devices where there is Internet connectivity. Pandora’s mission is to connect and bring consumers music and comedy to their liking, 3 by using the carefully constructed Music Genome Project; a continuously built song catalog, with proprietary algorithms for building personalized playlists for listeners based both on analysis and feedback data from listeners. Through innovative thinking and by developing new creative sources of revenue, Pandora will be the leading Internet Radio Service with sustainable growth in a competitive global market. Pandora will conveniently provide consumers with the best radio listening experience based on their own preferences, and connect artists directly to their fans.
Over the past decade, the music industry has faced a gradual decline in traditional record stores and album sales. Between 2000-2012 record store sales declined more than 76%, and CD album sales declined by 50%. In 2006, Tower Records closed all of its 89 US stores, followed by the closing of all Virgin stores in 2009. In recent years demand for digital music sales have exploded. In January 2012, digital music sales surpassed physical musical sales, making up 50,3% of all music sales. 4 This trend has resulted in various threats and opportunities for the music business and their traditional business models. Traditional lines that once divided artist, publisher, record company, distributor, retail and consumer electronics are now indistinct. Artist management companies promote and market recordings on behalf of their clients, and consumer electronics companies have become digital music retailers. When iTunes launched in 2001 it revolutionized the music industry. In the following years, online music streaming and Internet radio services have become the fastest growing form of music listening in the US. 4
A digital and connected life has become the norm, replacing almost all of the old ways we used to consume media. Today, 70% of music listening takes place through mobile and tablets. As people consume more music and information on mobile touch screens running on multiple platforms, streaming companies such as Pandora will continue to gain traction, and sharing music online will be more important than ever. The music industry is increasingly facing the issue of “free”. The digital revolution has essentially made music free, requiring music business to seek revenue from advertising, merchandise, sponsorships and premium subscriptions. For services like Pandora, royalty structures in effect with respect to the public performance of sound recordings in the United States, content acquisition costs are increasing with each additional listener hour.
Compounding the issue of defining copyright boundaries is the fact that the definition of "royalty" and "copyright" varies from country to country and region to region, which changes the terms of some of these business relationships. Digital subscription radio services have had to overcome significant regulatory challenges and barriers that have been erected as a result of National Association Broadcasters lobbying on behalf of traditional analog broadcasters. However, government regulation of all aspects in broadcasting is generally more stringent in foreign countries.
Artists are increasingly focused on building their music careers outside of only iTunes or Amazon sales, and are emphasizing efforts on direct-to-fan marketing and limited edition physical goods, like merchandise, sponsorships, retail and performance. Many now own their own publishing companies, and promote and market themselves using free services such as YouTube or social media. The future will presumably see a continued convergence of these trends. 5
New digital music distribution technologies have also forced both government and industry to re-examine the definitions of intellectual property and the rights of all the parties involved. Illegal music downloads currently account for 95% of all music. 6 Internet radio has proven to have a positive effect on both music sales and the curtailing of music piracy. Overall music purchasing declined last year, but the average Pandora listener purchased 29% more music during the second quarter of 2012 compared to last year. Additionally, Pandora listeners' music acquisition came increasingly from legal purchases, while non-listeners showed a decline.7
Pandora faces intense competition, with rivals from some of the biggest tech players to specialized music services with gaining popularity. Apple recently hinted that they will be entering the streaming-music movement, and are assumingly gathering necessary licensing rights from the record labels that already rely on the tech giant as the country's top music retailer. Satellite-radio Company, Sirius XM, has decided to offer its customized Internet radio service within the next few months. Microsoft recently launched Xbox Music with 30 million “free” songs. Sweden-originated Spotify offers an online music service that let’s consumers create free playlists online, and subscribing consumers to save playlists and play them in offline mode on smartphones, computers and tablets. They also recently launched a radio function, similar to Pandora’s functionality. Techgiants like Google and Amazon have already established online digital music stores and are expected to launch free music streaming versions in near future. Other small competitors are Clear Channel owned iHeartRadio and the currently European-based music streamer, Deezer. 8
Pandora’s greatest source of revenue accounts from advertising, which is now $89.4 million. Pandora has proved strength in this area by offering both visual and audio distribution, and is currently rated second in mobile advertising revenue after Google 9. Despite these facts, Pandora has currently not been able to generate additional revenue from advertising products to meet growth in listener hours on mobile and other connected devices. Until now Pandora’s advertisements have mostly been for national brands and have received critique for being irrelevant. By tailoring ads more user-specifically based on account, demographic and location information Pandora would attract more relevant advertisers. 50% of advertising revenue is now from mobile advertising, highlighting the importance for Pandora to better integrate on these platforms as the trend is expected to grow. 10 Revenue from subscriptions are $11.9 million, a 37 percent increase from last year. 1 These numbers indicate that there are real opportunities to further convert more free users to subscribers by developing new strategies, and that users are willing to pay for a better and more convenient music experience. As more competitors enter the market, it becomes progressively important to maintain brand recognition and position as number one in the US market. Pandora has generally not advertised itself in the past, but as consumers increasingly interact online, opportunities exist within gaining visibility in social media networks.
Economies of scale
1. Partnership with Verizon / AT&T
In 2011, Pandora Media partnered with Verizon to offer its Internet radio service to subscribers of Verizon's high-definition TV service FiOS. This allowed for easier access to Pandora through home entertainment systems. For Pandora, access to and good pricing on data plans will be an integral part of the respective business. One hour a day of Pandora consumes nearly a gigabyte, and a classic argument against the concept of Internet radio has been data costs. As more carriers and IPSs offer streaming music and movie subscriptions, a partnership between Pandora and Verizon or AT&T could increase Pandora’s prospects of attracting more free users to become subscribers. The respective companies would integrate Pandora One’ app (Pandora’s subscription app) amongst their other carrier apps on their smartphones and tablets, and after one-month of free usage, consumers would, upon notice and approval, be charged a monthly amount of $3.99 automatically added to their phone bill. This subscription fee matches the original price in the app store, but the customer would be relieved of additional data cost for using Pandora through their carrier. The companies would split subscription revenues coming from the integrated apps. The Pandora One account would be valid in all other devices utilized by consumers, including automobiles, tablets and web usage. The free version of Pandora would still be available in the phones Android or App stores, but the partnership would make the service more prominent and the payment less visible, hopefully attracting more people to the subscription model. Considering Verizon’s 111,3 billion and AT&Ts 105,9 billion subscribers11, opportunities for additional users and subscribers would improve significantly.
2. More and better advertising
To successfully monetize growing listener hours, Pandora must convince a substantial base of local advertisers the benefits of advertising by demonstrating the effectiveness and relevance of advertising across the range of delivery platforms. To increase revenue from advertisers Pandora can also afford to increase the number of ad campaigns per hour for traditional computer, mobile and other connected device platforms sold to local advertisers. By detecting users location more accurately (not just zip code as in the current model) Pandora can attract local advertisers such as Groupon, Amazon Deals, Living Social and Google Offers to promote deals nearby. This would place Pandora in more direct competition with broadcast radio for advertiser spending.
3. Strengthen brand recognition and gain visibility
Pandora’s current website does not sufficiently promote social networking sharing or subscription options. The website looks dated and the small link promoting subscriptions is located in the high right corner of the site, contradicting the intention of attracting more subscribers. Promoting the benefits of subscriptions more aggressively and during audio breaks would attract more attention to the service. Furthermore, a partnership with Facebook, Twitter, Google + or LinkedIn would simplify the distribution by integrating a more visible “sharing” button on all Pandora’s platforms, a strategy that predictably would attract more users to Pandora.
4. All-in-one application
Consumers are now accessing music from several different services. As convenience becomes increasingly important to user satisfaction, Pandora should develop a Pandora One application that can transfer playlists from Spotify and iTunes into the Pandora app. Users would then pay for music through the original services, but Pandora would offer the convenience of integrating all the music into one application.
5. Develop sound quality
Listeners are not as occupied with sound quality as they used to be. Pandora has an opportunity to change this. By further developing sound quality in the subscription-based version and establishing a significant sound-difference, free users will have a greater incentive to become subscribers.
6. Offline listening
If regulation allows it, Pandora should develop an offline listening mode so that users can preload a playlist to listen to when anticipating that they will be in a place without Internet connection (subway, basement, etc).
Economies of scope
7. Direct-to-fan communication
Pandora recently released a new and better application that allows users to access song history and review, rate, or bookmark previously played tracks. One feature set is an encyclopedia-like exploration function. Listeners can access full song lyrics, artist bios, similar artists and tracks and track features from the Music Genome Project. This application can be further developed to allow artists to promote themselves directly through Pandora’s channels. Pandora can also scope their economy by offering to sell the artists digital albums directly from the site, and offer the artist 3$ for each subscriber they manage to attract. By facilitating their direct artist-to-fan communication, Pandora strengthens the possibility for a favorable outcome during the Digital Millenium Copyright Acts renegotiation in 2015 (bringing the royalty rates of non-interactive streaming services down to match satellite radio, 8% versus the current 50%).
8. Gaming, merchandise and video
Since music royalty fees are the main source of cost, Pandora should look into the possibility of expanding their income possibilities by offering games, merchandise or possibly partnering with an online video streaming site like Netflix or Hulu.
Strengths and challenges:
Pandora’s strength lies within its established brand recognition, its 150 million users, Music Genome Project and loyal relationships with music labels. The strength of these propositions lie within the probability that they are simple to execute and that partners are likely to co-operate, as they are mutually beneficial to partners and consumers. A challenge for Pandora is that the existing business model with advertising as main source of revenue will not be sustainable in the long run. There is a limit as to how many ads one can play during an hour of streaming before the listening experience is impaired and consumers seek competitors. Pandora’s listeners played more than 1.15 billion hours of music in September, 67% more than last year, while total listeners surged nearly 50% to 58.3 million. For any normal business this would be good, but Pandora’s greatest weakness is that this means paying nearly 50% of revenue to content acquisition costs under existing Internet radio rules. For every song streamed, Pandora must pay a percentage to music royalties and with an increasing amount of users, this amount simultaneously grows. For Pandora, this means finding creative new ways to make profit, in addition to attracting more subscribers if they want to remain sustainable.
By attracting more subscribing customers Pandora will generate more profit. Subscriptions accounted for 12% of total revenue for Pandora as of July 31, 2012, a 37% increase from last year, indicating that users are increasingly willing to pay for music if the product is good enough. Advertising accounted for 88%. If revenues from subscriptions and advertising continue to increase, it will balance out the large amount of revenues paid for content acquisition as the more people pay for the service the more they will generate profit. Having free subscribers is good for advertising, but for every free user additional costs are added to the equation. This business plan presents the following outcomes.
Base: Pandora has a 50% increase in subscribers during the next year in addition to attracting new free users. Artists and labels react positively to the business proposition and Pandora manages to attract more artists to promote themselves on the site.
High: The majority of Pandora users become subscribers and artists are highly enthusiastic about the possibility’s to further promote themselves through Pandora’s site and cooperate willingly to develop more ways to increase revenue. Advertisers are encouraged by the idea of local advertising and realize that they have to adapt to consumers preferences of mobile usage. This results in further investments in mobile advertising platforms.
The team should consist of the following key personnel:
Brand developer: Further develop Pandora’s greatest strength, its brand recognition and visibility through social media.
Marketing executive: An account person that develops local advertisement deals, and configures a way to more accurately detect preferences and locations of listeners.
Artist managers: 3-4 people to establish relationships and negotiate deals with artists and labels. A person should also be appointed to exploring possibilities within merchandise sales.
Head of partnership account: A person responsible for the establishment of partnerships with wireless carriers, and work out details on how to make the partnerships profitable by determining the financial aspects of additional data costs in comparison to the increase in subscription revenue.
Sound and website engineer: A person appointed to further improve sound quality and develop/renew the websites design.
Agree on which improvements should be made and start working out details surrounding partnerships contracts, artist relationships, advertising strategies and web development.
Approximately 100 million registered users have accessed Pandora through smartphones and tablets, and 54.9 million active users have created over 3.2 billion stations. Pandora currently has 55 million active users, up by nearly 50%, and twice as many as Sirius XM.
Pandora’s revenue for the second quarter of its fiscal 2013 was 101,3 million, a 51% increase from last year. Because of exceeding expenses per listener and music royalty legislation, Pandora reported a net loss per share of $0.03, in total $5.4 million.
Mobile revenue increased 86% to $59 million, more than half the company’s business and bigger than Apple’s total mobile ad business.
Listeners spent 3.3 billion hours on Pandora in the quarter, up 80% from last year.