Mike Herring

Pandora CFO on ratings, ad sales, and subscriptions

Thursday, 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.”

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."

Pandora grew audience share in October, dropped listeners

Tuesday, November 5, 2013 - 11:50am

Pandora released its internal audience metrics for October, in a Morgan Stanley conference late today in San Francisco. Pandora CFO Michael Herring presented the October results. The October report carries special significance inasmuch as it represents the first full month of iTunes Radio operating in competition with Pandora.

Pandora’s monthly metrics report contains three key indicators:

  • Share of total U.S. radio listening
  • Number of hours of music consumed
  • Number of active users

In October, Pandora’s reported listening share in the U.S. rose to 8.06 percent from a September share of 7.77 percent.

There was also month-over-month growth in consumed hours, from 1.36-billion hours in September top 1.47-billion in October.

The much-discussed “active users” measure dropped in October from the previous month, settling at 70.9-million users, a 2.5% drop from September’s 72.7-million figure. The share of U.S. radio listening measurement is controversial in the radio industry, and has been disputed by industry executives. When RAIN asked Pandora about the methodology of the share-of-listening metric, we received this reply:

"Pandora arrives at this calculation using data from Triton Digital, Arbitron and the U.S. Census. The estimated total hours include satellite radio. There is no one group that measures total radio metrics. We welcome all third-party research from a variety of established partners, including Triton Digital, Edison Research, The Media Audit, comScore and Nielsen. Ultimately, we would like to see all radio measured side-by-side."

QUICK HITS: Merlin and Pandora execs speak out

Tuesday, October 15, 2013 - 9:55am

Merlin CEO criticizes label deals: In a conversation with Janko Roettgers of GigaOm, Charles Caldas, head of prominent indie-label consortium Merlin, points to a basic aspect of business modeling behind Spotify, iTunes Radio, and other major players. The advance payments to major labels, Caldas warns, sets up an unsustainable situation for small labels that are excluded from broad dealmaking. Caldas expands his thinking beyond Merlin’s constituency; he thinks music services are being set up by for failure by the labels.

Pandora CFO holds forth: In a CNET interview, Pandora CFO Mike Herring delivers crisp C-level talking points about Pandora’s business and ongoing royalty controversies. No breakthrough knowledge to be gleaned, but the interview provides a concise summary of Pandora stance. On royalties: “It’s not about lowering rates -- that’s about creating fair rates across lots of distribution channels.” On Apple’s launch of iTunes Radio related to the cost of doing business in the streaming space: “It took someone, frankly, with a lot of cash in the bank and a big income statement like Apple to finally launch a competing service.” 

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