A Story

Rdio finds its new CEO, Anthony Bay

Tuesday, December 3, 2013 - 12:40pm

Two weeks after restructuring its costs via workforce downsizing (in other words, layoffs), Rdio has named a new CEO. Anthony Bay, former head of digital video at Amazon, replaces outgoing CEO Drew Larner, who becomes vice-chair of Rdio’s board. Larner announced his resignation five months ago.

Bay has been involved in digital media for nearly 20 years, with stints at MOD Systems, Loudeye, and Microsoft where he was GM of Redmond’s Digital Media Division. He left Amazon in March of this year in an executive shakeup in the company’s digital services department. At Amazon, Bay’s purview included Amazon Prime, the subscription video-streaming service, an operation which parallels Rdio’s business model in some respects.

Rdio is facing a daunting competitive landscape in the U.S. market, with direct competitor Spotify owning a larger user base, and Google All Access enjoying a vast ecosystem placement in front of millions of potential users. Furthermore, newcomers Deezer, YouTube, and Beats Music either rumored or promised to enter the fray in the next few months. All these subscription services compete generally with Internet radio platforms such as Pandora, iTunes Radio, and dozens of smaller players for a broad listening audience which doesn’t necessarily recognize how the brands differ.

Google leak fortifies rumor of a YouTube music service

Monday, December 2, 2013 - 12:15pm

Although we and most other observers have been presuming an imminent YouTube music service to be ordained fact, it is merely a widely-reported rumor. That rumor got a strengthened spine when the Android Police website performed a “teardown” (examination of code) on the latest version of YouTube’s Android app.

Scrutinizing code can sometimes reveal placeholders of functions planned for the future, but not yet implemented. To code-savvy snoopers, those strings are like Easter eggs. In this case, they offer scant but intriguing glimpses that could match up to the rumored music service. 

The findings:

  • A name: Music Pass;
  • A reference to offline playback, a feature usually associated with subscription listening platforms;
  • A feature referenced as “background listening,” which doesn’t make much sense in a video service, but is perfectly sensible for a music service;
  • A feature called “Uninterrupted music,” with this marketing string: “No ads on millions of songs.”

Android Police also found graphic icons associated with the placeholder features.

In light of these revelations, we continue to presume that Google is readying a music subscription service on its YouTube platform, and our core question holds firm. What added value will Google bring to the service which might persuade YouTube users to pay for a platform which is already free, opulently stocked with music, and the go-to source of listening for teens? We need more Easter eggs to answer that question.

Spotify as star-maker

Wednesday, November 27, 2013 - 12:05pm

The “Spotify debate” swirls around one core hypothesis: Musicians don’t get enough value from the service. As such, Spotify is a surrogate for music streaming sites, which promote access instead of ownership, and attention instead of purchases.

The debate flared up again this week, in a caustic exchange between Thom Yorke of Radiohead and Moby. Moby called Yorke “an old guy yelling at fast trains.” Yorke emitted a Twitter yawn.

Spotify evangelists, especially founder Daniel Ek, repeatedly preach that it is still early days for streaming, and that massive future scaling will eventually solve complaints about the model’s revenue potential for recording artists. (Spotify’s investors have reportedly bought some time to build into that future with an eye-popping new funding of $250-million.) 

But the entire subject of artist revenue on Spotify might be moot in the long run. What if streaming services are really about exposure of potential stars? What if Spotify’s true role is more about leverage than earnings? In other words, is Spotify the new radio as a hit-making influencer? 

A just-published piece in Forbes lays out a timeline of Lorde’s success in Spotify, identifying Spotify’s role in building awareness of the artist and her not-yet-hit single, “Royals.” Key to this conception of Spotify as a star-maker is the early-mover power of virality inside the app. Two weeks after entering the Spotify catalog, “Royals” was featured on an influential public playlist followed by nearly a million users. That was back in April. From there it jumped to Spotify’s in-house charting system, where it climbed quickly. Two months after that, the song entered radio playlists. One month after that, “Royals” was recognized on the Billboard Hot 100 chart.

This timeline is meaningful and emblematic of “crowd wisdom” which is supposed to shape a more democratic media landscape, but which so often doesn’t seem to. The Spotify crowd pushed Lorde into broadcast’s gigantic audience, and onto the charts. As to Spotify’s much-debated role as an earnings machine, “Royals” has been streamed 100-million times in Spotify alone. That would probably furnish a good-news earnings story for the music service if the figures were ever disclosed.

Pandora shifts royalty focus away from Internet Radio Fairness Act

Tuesday, November 26, 2013 - 12:25pm

According to a report in Billboard, Pandora will no longer lobby for passage of the Internet Radio Fairness Act (IRFA). Instead, according to Billboard’s source, the Internet radio company will concentrate on the upcoming statutory royalty period, the rates for which are set by the Copyright Royalty Board. This shift of focus would re-allocate Pandora’s resources from one part of government to another, abandoning congressional solutions for arbitration and possibly market negotiation.

At stake is the cost of content for Pandora (and all digital music services), and the business conditions in which Internet radio will thrive or not. Royalty rates -- the payments to music owners for the right to broadcast or stream music recordings -- represent the wholesale cost of music. Unlike suppliers in most other industries, labels/artists (owners of recorded masters) and composers/publishers (owners of intellectual property), do not always use market negotiation to determine their prices. In the U.S., laws and arbitration processes form the basis of statutes which determine prices. Private negotiation can occur alongside that basis. 

The Internet Radio Fairness Act was introduced to address unevenness is statutory rates. Kurt Hanson, CEO of AccuRadio and Founding Editor of this site, wrote when the IRFA was introduced, “The current confusing mix of royalty-rate setting standards for digital radio is the result of piecemeal legislation enacted as each new technology was invented. The result is a system significantly out-of-sync with the realities of the 21st century marketplace.”

In the current system, cost of content differs in percentage terms across different distribution mediums. The biggest rate disparity is between broadcast radio and Internet streaming: Broadcast is not required by law to pay labels and recording artists for the use of recordings, but Internet radio is required to. This irregularity has been addressed to a limited extent by private deals between label groups, radio groups, and Internet music services.

By swiveling its spotlight from congress to the Copyright Royalty Board (CRB), Pandora is placing a new bet. Current statutory royalty rates run through 2015. Next year begins a rate-setting process for the following five-year period. For each cycle, the CRB is mandated to determine cost-of-content prices that reflect open-market realities. The difference in the upcoming cycle is that there is a more substantial open market than in previous cycles, and therefore more reference points with which to frame arguments. For example, Apple hammered out the content costs of its iTunes Radio streaming business via negotiated deal-making with music owners. Likewise, Clear Channel’s proprietary agreements with Warner Music and many smaller label groups provide open-market examples. Same with the alliance of the Cumulus radio group with Internet pureplay Rdio.

Pandora might also explore the direct-negotiation path, though it has not made private deals in the past. The company is fairly cash-rich, with about a half-billion dollars in the bank, thanks in part to a secondary stock offering completed this year. When asked about direct music licensing in last week’s earnings call, CEO Brian McAndrews replied, “[The public offering] puts us in a better position to have the right conversations."

Whatever Pandora’s future cost-management strategy, David Oxenford, author of the Broadcast Law Blog, observes that Pandora’s prioritizing is sensible: “It does make sense for all webcasters to start to focus on the CRB proceeding, as the notices of intent to participate in the next webcasting case will probably be due in January.” Oxenford also notes that we are still two years away from a decision regarding new rates, which will be announced in December, 2015, for the 2016-2020 royalty period. 

Spotify extends its runway with new funding

Monday, November 25, 2013 - 2:00pm

Jumbo jets need longer runways to take off than smaller planes. With reported new funding that nearly doubles its previous capital investment, jukebox service Spotify buys time to continue building momentum. The question is: Whither the destination?

Spotify’s new funding comes from a single source: Technology Crossover Ventures (see RAIN coverage here), which maintains an investment interest in high-growth tech companies. The capital injection brings Spotify’s total investment level to $538-million over the five years of the Swedish company’s life. 

The online music service landscape is changing fast. Jukebox-style streaming, which includes random access of tracks, albums, and user-built playlists, is not new in the scale of Internet app development. But the rate of awareness in the U.S. market, and the supply-side scramble for audience share, is escalating dramatically right now, making the Spotify investment a crucially-timed bet on its ability to withstand tectonic pressures. 

Tellingly, it was Spotify that sparked an acceleration of the streaming business in the U.S. The service expanded into the American market in 2011, and its free-of-charge listening tier attracted new users with a streamlined on-ramp that subscription-only Rhapsody did not offer. David Bakula, SVP of Analytics and Client Development at Nielsen told RAIN: “Spotify actually changed the culture, and started to get streaming on the [U.S.] map.”

Rhapsody and Rdio are Spotify’s most direct U.S. independent competitors -- all three provide the “celestial jukebox” model of music service, as opposed to the lean-back radio-style of listening furnished by Pandora and iTunes Radio. Google All Access and Xbox Music (Microsoft) are ecosystem entrants into the music subscription field. Brand new U.S. competitors are rumored or promised by YouTube, Deezer, and Beats Music.

The distinction between indie and ecosystem is an important one. Providing a music experience is Spotify’s only business. For Google, Microsoft, and even Apple, music is a network feature designed to retain customers in the core businesses of those companies -- software, hardware, and services. If music is a loss leader for an international technology company, the conversation around that quarter’s balance sheet is entirely different from the analysis of red ink for a music-only company.

Spotify’s red ink is mostly accountable to content costs: About 70 percent of company revenue was paid out to music owners in 2012. That single statistic casts a shadow over the entire independent streaming music business, as statutory and direct-negotiated licensing fees make it difficult for less-funded companies hunker down for the long business of scaling audience.

Spotify’s valuation after this funding round surpasses $4-billion, according to the Wall Street Journal. As we recently noted, publicly-traded Pandora is market-valued at over $5-billion. Spotify’s worth could make it an unwieldy acquisition, though not out of the realm of possibility for Google, Microsoft, or Amazon. (Keeping in mind that Microsoft’s acquisition of Nokia brings with it Nokia’s music service, just relaunched as MixRadio.)

The IPO route might be a more likely investment strategy. In whatever direction Spotify tilts at the end of its runway, it will benefit from the extra time spent growing its international footprint and developing its subscription business.

The Pandora earnings story

Friday, November 22, 2013 - 8:25am

"We have made significant progress in disrupting traditional radio in a short time, but we are just getting started." --Brian McAndrews, Pandora CEO

Pandora's business mission is essentially invasive, intending to transform consumer habits by migrating listening from broadcast to Internet. In yesterday's earnings call, details were laid out about how the company has succeeded so far, and some future directions were illuminated.

The financial headlines were these:

  • Record quarterly revenue ($181.6M, +50% year over year)
  • Growth of listening hours (4.18-billion, +17% year over year)
  • Shrinkage of audience month-over-month, but 20% growth year-over-year;
  • Mobile revenue driving earnings growth, exceeding the $100-million benchmark; 
  • Growth of total radio share to 8.06% (a sometimes-disputed number, derived by proprietary calculations), representing an 8% year-over-year increase.

There has been media swirl around the reduction of listeners from September to October (from 72.7M to 70.9M), with analysts and other observers citing a Pandora-demolishing effect of iTunes Radio, which launched on September 18. Pandora CEO Brian McAndrews refuted that interpretation early in his opening remarks of the earnings call.

CEO Scene-setting

McAndrews clearly, but without citing data, laid out a different reality. He claimed that the reduction was indicative of "our most casual and least engaged listeners" taking Apple's new service for a test drive. McAndrews added that Pandora's internal metrics show stabilization and return of the transgressing listeners. (Pandora releases monthly audience metrics in the first week of each month, for the previous month, so the McAndrews Stabilization Hypothesis will be tested in about two weeks.)

Brian McAndrews' prelude to the financials centered around earnings power and product enhancements. On the product side, he noted the recent releases of upgraded iPad and Android apps, both covered in RAIN. We reviewed the 5.0 version of Pandora's mobile experience favorably, both for its elegance and uniformity across platforms. The latter is a premium value in our eyes, as listeners increasingly surround themselves with a diversity of gadgets.

On that point, McAndrews was downright futuristic, referencing The Internet of Things, a tech meme pointing to a ubiquitously connected world of networked personal gadgets, home appliances, the coffee mug sitting on your desk, and just about everything else. In that context McAndrews noted Pandora's recent integration with Google Chromecast -- not exactly a meme-thing, but we get his overall distribution point, especially given Pandora's exceptional connected-car initiatives.

In the context of revenue and product being twin pillars of pandora growth, McAndrews referred to the company's evolution "from scrappy startup to mature company."

Key Financial Equation

Throughout the call, Pandora emphasized earning power as the underlying, catalytic converter of growth. The key data nugget comprises revenue per thousand listening hours (RPM), licensing cost per thousand hours (LPM), and how the two move against each other.

Mike Herring, Pandora CFO, noted that while licensing costs are relatively fixed and stable, rising fractionally year-over-year, RPM has climbed sharply year-over-year from $34 to $43. Like tectonic plates grinding against each other, those two metrics produce a shakedown of content-acquisition cost. (In the longer view, it should be noted, licensing costs are not fixed, either on the statutory side or in the direct-negotiating realm. So this key equation will be closely watched as a new royalty rate period is established next year.)

On the same point, one analyst cited Pandora's cash hoard of nearly a half-billion dollars, thanks partly to a secondary public offering earlier this year, and queried whether the company would spend some capital on direct licenses with music owners. The question is significant because deep-pocketed competitor Apple went down the direct-licensing path from the start with majors and large indie labels. Having those private royalty relationships enables Apple to expand iTunes Radio internationally faster than relying on nation-specific royalty rules. (Pandora currently operates only in the U.S., Australia, and New Zealand.)

Pandora's response was interestingly hedged. Brian McAndrews noted that direct licensing has always been an available option, but conceded that "we are happy with how the public offering went," and the money "puts us in a better position to have the right conversations." Our money (betting money, that is) has Pandora waiting to see how much Apple's negotiated royalties influence the government's royalty framework for the upcoming period.

Advertising Interest

In the earnings call, analyst questions circled around advertising, in two main respects. First, the ad load, and second, the user targeting. The second point pivots around Pandora's new listener identification product that uses registration information, plus listening choices, to place users in broad ethnic or demographic groups for advertisers. The first rollout focused on ID'ing Hispanic users. Pandora noted that as a test, that first implementation was successful, and promised future new segments under development. (No specifics were divulged.)

Pandora disclosed its current ad load: a maximum of three minutes per hour, with 30 seconds being the maximum length per spot. The execs forecast a gradual rise to four minutes per hour, noting that broadcast lived in the 12-16 minute range, and observed that Pandora perceives substantial earning upside without approaching broadcast load. Advertising CPM was described in the $9-$12 range. At the current RPM of $43, Pandora claimed that it was earning 60-70 percent of broadcast RPM, at 20 percent of its ad load. Driving the knife a little deeper, McAndrews mentioned that Pandora provides much better results tracking.

Measurement Morass

One questioner asked about getting Pandora into the broadcast traffic measurement matrix, in the post-Arbitron world of Nielsen Audio. Doing so would unlock the controversial share-of-listening statistic. Pandora's response seemed wistful, and perhaps a touch caustic: "Clearly we would like this, Nielsen would like it. We are dependent on them."

Syndicate content