12/5/2013: Pandora CFO speaks out

Brad Hill
December 5, 2013 - 12:10pm

Pandora CFO Mike Herring addressed the Credit Suisse 2013 Technology Conference this week. The format was a moderated Q&A session. We pulled out three subjects within which Herring’s responses were of particular interest: ratings measurement, how Pandora sells ads, and its hybrid subscription/advertising revenue model.

On the subject of ratings, Herring pushed Pandora’s agenda of inclusion in traditional radio measurements developed by Arbitron (now Nielsen Audio). His talking points echoed what CEO Brian McAndrews said in Pandora’s recent quarterly earning teleconference, and we expect the company to continue hammering away on this issue. Currently Pandora releases a proprietary “share of total U.S. listening” metric every month, a number that disputed by some broadcast executives.

HERRING: “You mentioned Arbitron, they currently don’t measure streaming services like Pandora. Now that they’ve been acquired by Nielsen, conversations are ongoing. We’re optimistic that they’ll embrace the future [by] allowing us to be measured alongside broadcast radio. That’s what we’ve always wanted. Our release of monthly metrics are really about trying to put a stake in the ground about how we’re measured, how we stand up next to the competitors we have in the market for advertising dollars. We’d love to have that measure, [to be put] side by side within the Arbitron system.” 

Herring addressed a question about the rise of programmatic ad-buying, and how Pandora’s large-scale build-out of a sales network fits into the automation trend. Herring’s answer acknowledged the importance of both sides, and defends the future of personal selling.

HERRING: “So, you really have to think about it in two buckets. So, the audio side of the business or the broadcast side -- $15 billion in radio is really a consultative sale. You are [personally] pitching buyers on the value of your audience I don’t see that becoming an automated platform soon.” “We hear a lot about programmatic buying [...] on the digital side of things. And Pandora is going to be right alongside the leaders in that space in developing capabilities there. But on the audio side there will always be a feet on the street. You are out pitching agencies [which is] why we put people in 29 local markets last year to really pitch local radio advertisers.”

Herring addressed paid music and free music. When there is a steady focus on the subscriber number -- how many Pandora listeners pay a monthly fee to remove advertising -- analysts often must be reminded how Pandora prioritizes and balances the two sides of its business. In his reply, Herring valued subscriptions, but emphasized the advertising side of the revenue equation.

“[We] got to 3.18 million subscribers at the end of the last quarter. It’s a great business [which is] 20% of revenue. But at Pandora we fundamentally believe the big opportunity is not the 20% of people in the United States that are willing to pay for music. And there are a lot of streaming services that are fighting to get a piece of that market. We have a piece of it as an adjunct to our free business. We also have 67-69 million people who have grown up believing that music listening should be a free experience. They’re willing to listen to advertising associated with that. We think that’s a much bigger addressable market and that’s why we focus so much time on that. The subscription business will always be an important part of our business but not the main growth driver long term.”

Brad Hill
December 5, 2013 - 12:10pm

The “Spotify Debate” has been raised to a new level. It features the same debate points, but now presented as dueling websites. Until now, the war of words and philosophies was waged in sniping blog posts and interview quotes among well-known musicians and pundits on both sides of the streaming music fence -- such as David Lowery, Thom Yorke, David Byrne, Billy Bragg, and Bob Lefsetz.

Here’s what’s going on this week. 

On Monday, subscription music service Spotify launched SpotifyArtists, a resource site for musicians that also (naturally) advocates for Spotify as a distribution platform. The site presents an anatomy of Spotify royalty infrastructure, demystifying how payouts are calculated and clearing up misunderstandings. The site received widespread media attention for its transparent revelations and its resourceful reach-out to musicians.

Although Spotify’s website is named “Spotify Artists” in the page header, the browser-tab branding is “Spotify for Artists,” and a banner on the home page reads, “Welcome to Spotify for Artists!”

That’s important because today a new site appeared: SpotifyForArtists. With a similar look-and-feel, and nearly identical logo and trademark branding, it is confusing and fooling people, including Radiohead-affiliated producer Nigel Godrich, who nearly burst into flames on Twitter before being set straight about the hoax.

The spoof site is a poker-faced takeover of Spotify’s voice, realigned to the priorities of its most vehement critics. “We’ve really changed our ways,” the opening header declaims. Scrolling down the page reveals Spotify’s faux-intention to begin selling albums (with 95% of proceeds going to the artist), offer a consulting service to help musicians write better contracts with labels, and eliminate “secret math” describing how artists get paid.

It’s all entertaining (if arguably actionable), but with a serious purpose of continuing the debate and opposing the educational and peacemaking intent of Spotify’s real artist resource site. Whether it succeeds depends on individual viewpoint.

Kurt Hanson
December 5, 2013 - 12:10pm

One reason that listening hours per week per capita to Internet radio are increasing (according to both the annual Arbitron-Edison "Infinite Dial" study and easy math you can do with monthly Triton Digital press releases) and listening hours per week per capita to AM/FM radio seem to be declining (if you're an Arbitron subscriber, check Persons Using Radio (PUR) trends in your market) has got to be due to a number that is sneaking up on us: How many devices do we own that pick up each medium?

Let's do a quick count. I think the answer will be enlightening (or alarming, depending on which side of the fence you feel you're on nowadays):

Regarding the number AM/FM radios I own, even though I'm atypical in that I have lots of emotional connections to the Chicago stations I used to work at, and have friends that still work for various stations in town, my personal count is down:

I spent decades waking up to a clock radio with AM/FM, but my last Sony model went into storage about four years ago as I started using the alarm feature on my smartphone instead.

Like many of you, I used to have a great big stereo system (amplifier, AM/FM receiver, tape deck, CD player, and giant speakers), but that went away in pieces over the last decade as I ripped my CDs onto my iMac and replaced my TV sound system with a soundbar.

I used to have an FM Walkman of one type or another for running, but now, since I use the Nike Plus app on my smartphone for measuring my speed and distance, of course it makes sense to use the same device for accompanying music.

My parents have an AM/FM radio in their kitchen, atop the refrigerator, but I never picked up that habit.

Again, I'm atypical that, as a Chicagoan, I have "cut the cord" on car ownership thanks to an improved CTA (and apps that tell me when buses and trains are due), Uber (better and cheaper than taxis), and Zipcars (car rental by the hour), so no more AM/FM in the car in the garage since there's no more car.

I used to have a compact stereo system in my study, but its one-CD capacity seemed so old-school that it's in "temporary" storage somewhere, replaced by a speaker dock for my iPad.

Total household count: Down in the past decade from six or seven to either one (if I can find my missing iPod Nano, which has FM) or none.

Meanwhile, let's do the count of the number of devices in my household on which I can access Internet radio:

  • Current iPhone 4S
  • Older iPhone (used as alarm clock, etc.)
  • iPad (especially when paired with speaker dock)
  • Apple TV (attached to older TV)
  • PlayStation 3
  • New LG Smart TV (my big splurge of the season) 
  • Decrepit (but still plugged-in) HP Windows 7 PC
  • Seldom-used (due to hideously bad user interface) Dell Windows 8 touchscreen PC
  • Regularly-used iMac
  • Seldom-used laptop (as I transition to becoming a full-time tablet user)
  • Squeezebox Radio (purchased in 2011 but seldom used, as I prefer the iPad in the speaker dock).

So that's generously a 10:1 ratio in favor of Internet radios (of one form or another) over AM/FM radios.

As I said, I'm sure I'm atypical...but feel free try it yourself! And then try it with your parents, your siblings, your friends, and/or your in-laws.

I'll bet the general conclusion will be the same: More active Internet radios than AM/FM radios.

There are fads, and there are trends. (According to the marketing consultants Jack Trout & Al Ries, you want to avoid getting caught up in the former and take the latter seriously.)

This one is a trend.