RAIN Analysis: Industry's future is as much broadcasters' as Pandora's

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Issue Date: 
Mar 9 2012 - 11:30am

From Issue:

The last few days have been rather rough for Pandora. Its stock slid after its reported earnings failed to meet its own or analysts' expectations. Even soaring revenues and monumental growth couldn't overcome its expenses that are rising even faster. And while words like "gleeful" spring to mind, suffice it to say that for many broadcasters (and trade journalists), these last days weren't as rough as they were for Pandora stockholders.

At this point in the development of this next generation of radio, it can be argued that Pandora is the online radio industry. Its usage and revenue dwarf the combined achievements of the rest of the industry so far (including broadcasters' online efforts), it's had a successful IPO, it's a player in the automotive- and home-entertainment industries, and so on. For better or for worse, at this point Pandora is the Internet radio industry.

And that's why it's important to share with you a thought (or, at least, remind you of this thought). It's not an original thought. It'll be familiar to anyone who's read Jerry del Colliano or Mark Ramsey. And anyone who's listened to RAIN's Kurt Hanson deliver his "State of the Industry" address at a RAIN Summit has heard it. And anyone who's read an interview with Pandora founder Tim Westergren or CEO Joe Kennedy has heard it too.

First, take a look what financial ratings agency Fitch Ratings said today in a new report called "Broadcast Radio Industry Assessment: Near-Term Declines, Digital Potential" (MarketWatch coverage here). Radio's advertising revenue (aside from "digital") will decline each year. People will spend less time with traditional radio. Internet radio, meanwhile, will continue to grow its audiences, fueled by growing mobile use. But given all that, here's the punch line:

Digital initiatives by terrestrial broadcasters, although in early stages, could provide an opportunity to capture a sizeable portion of digital listening over the next few years. Terrestrial broadcasters' established, high-margin businesses will allow them to fund digital initiatives and provide room to absorb near-term revenue declines before any digital revenue becomes material. 

Stated another way: Internet radio is radio's future -- a future which broadcasters are uniquely-suited to dominate.

Now, if Pandora is (at this point in time) Internet radio, and broadcasters's future is Internet radio, doesn't that mean...

Let's let Mark Ramsey (left) say it: "Pandora is, by a broad definition, radio – whether you like it or not, buster. They are radio and you are Pandora – if you choose to be," he writes today (here).

See, Pandora's two significant disadvantages compared to AM/FM -- low monetization of its mobile audience and unreasonably high royalties on music -- aren't going to last. Regarding the first, Ramsey writes, "Do I really need to remind anyone... that quite a lot of traditional radio’s advertising occurs on mobile devices – namely, the mobile devices that sit in your driveway? Indeed, one of the key advantages of mobile advertising on Pandora is that it’s utterly familiar to any advertiser who has ever placed a radio ad!" As for royalties, let's hear from Jerry del Colliano (right), who writes today (subscribe here):

Pandora will not die from this disease called record industry greed because if Pandora goes under, the record industry loses its number one source of music royalty income stream. So the labels will have to relent over time and give Pandora more reasonable rates. Radio on the other hand is facing a new performance royalty that their own NAB CEO is pushing so while Pandora is likely to get royalty relief down the road, radio is about to get saddled with more royalty fees. Bet on it. 

But, the flipside of that is this: Pandora doesn't necessarily have any distinct advantage over broadcasters. There's nothing Pandora -- or Internet radio -- does, that broadcasters can't do just as well, if they put the resources behind the effort.

So, back to that thought to share: Radio's future is digital. It's online, and it's mobile. Pandora's already doing it (as are many smaller, energetic, and innovative groups). And consumers are already headed there. But Pandora needn't "own" it. Broadcasters are still in the best position to stake their claim.

Del Colliano says, "Follow the consumer and you will never go wrong."

We'll give the last word to Ramsey: "Broadcasters enjoy magnificent scale and marvelous relationships with consumers and advertisers alike. Don’t trash Pandora, learn from them. My advice: Don’t get bitter, get busy."

Read MarketWatch's coverage of the Fitch Ratings report here. Read Mark Ramsey's blog here. Subscribe to Jerry del Colliano's Inside Music Media newsletter here.

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Yeah, the future of radio is

Yeah, the future of radio is definitely the Internet. In fact some would say that the future is now. I don't think there will be too many people alarmed by Pandora's stock slip because they will see more profits in the future.

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