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Summary:

Pandora finally went public last week, and with its focus on radio, the company has a better chance for mass adoption than most other digital music services. While it may be losing money now, here are a few steps it could take to raise revenues.

radio

After nearly 11 years as a “startup,” personalized radio provider Pandora finally went public last week, raising over $230 million and debuting with a valuation of over $3 billion. It may be a labor of love, but with its focus on radio, Pandora has a better chance for mass adoption than most other digital music services, as I detail over at GigaOM Pro (subscription required). The company is currently losing money (though not Groupon-style), but its solution is to raise more revenues rather than cut expenses.

While Pandora has a $12 per month $36 per year subscription service, 85 percent of its revenues come from its free, ad-supported product. It pays out a manageable 50 percent of revenues in royalties that are mostly set by the copyright board and are scheduled to go up a bit. Even as it grows, it will be difficult for Pandora to get lower, negotiated rates. In comparison, on-demand streaming royalties — the ones Rhapsody and Spotify have to pay — are significantly higher, and the margin on 99-cent singles is negligible. Since it’s going to be tough for Pandora to cut its costs, here’s what it needs to do to increase revenues:

  • Secure auto distribution. Auto manufacturers require a cut of revenues or customer-acquisition bounties, but cars made satellite radio. To accommodate smartphones, Pandora has deals with Ford, Mercedes-Benz and Mini. It needs to get more, and get in the dash.
  • Shift its mix. Spotify reportedly makes 60 percent of its money off subscriptions, so car companies could help Pandora move its revenue mix a bit toward subscriptions. Pandora doesn’t need to add an on-demand service. Though it seems appealing to bundle music discovery, passive and on-demand listening, and collection management, that hasn’t proven to be a killer combo for Rhapsody.
  • Focus on national audio ads. Analog radio advertising is a local business, but that requires a huge sales force or effective ad networks (Google abandoned radio, and networks like TargetSpot are relatively small). Since its mix is much lower than regular radio, Pandora can get away with adding more ads per hour. Doing so will somewhat compensate for lower prices compared to the display and video ads (which no one sees anyway) on its desktop product.

Pandora’s product and business model are aligned with existing consumer behavior, and they are adapting to mobility well. Pandora itself doesn’t have to work as hard as companies trying to justify the jukebox in the sky, and it doesn’t require as much effort from its audience as some of the new social music experiences. To read more about Pandora’s competition and how it matches up, see my weekly update at GigaOM Pro (subscription required).

Image courtesy of flickr user unclekage

  1. they could license their db to amazon, etc for smart playlists

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    1. Brandon: that they could. Licensing data was the original business model for the Savage Beast incarnation of Pandora.

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  2. The challenge that Pandora faces is the same challenge faced by almost all digital media companies: they do not have a sufficiently robust and flexible back-office to support new revenue and partnership models. Up to about three years ago or so, the partner ecosystem that delivered content was well defined and static. Therefore revenue sharing and settlement was a fairly simple matter. This is no longer the case.

    There are now multiple parties involved in the delivery of content whether the content is licensed or even advertisements. Generally, the parties involved in a transaction aren’t defined until the actual transaction occurs. Many companies have spent literally tens of millions of dollars trying to adapt their ERP systems to accommodate these transactions, and have failed miserably.

    Solving the billing, revenue sharing and partner settlement problem will be like giving the digital economy an enema (sic). There is much money ‘stuck’ in the system that would be freed if companies modernized their back-office systems.

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    1. Yep, back office operations are brutal, especially in the music biz.

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  3. David Stenglein Monday, June 20, 2011

    Ummm. Fact check please? Pandora has a $12 per YEAR subscription. Maybe they could charge a little more. I’d consider keeping my subscription at a reasonable increase.

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    1. You need to fact check your fact check David.

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      1. Sorry about that. Typo or math brain-spasm on my part. Apologies to Pandora; hope I didn’t generate any confusion.

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  4. These recommendations make sense if you believe that Pandora’s ‘grazing’ (pick a station and lean back) style of music consumption can stand alone as a product and a business model. I don’t think it can.

    I see people balancing ‘grazing’ and hunting (picking specific songs, artists or albums that they want to hear) as complementary ways to consumer music. Further, hunting behavior creates more purchase opportunities.

    Unfortunately for Pandora, there are a few companies who have good digital music sales operations, and more coming, and there are direct (and cheaper) competitors like Slacker, showing that Apple, Amazon or Google could pretty easily expand into Pandora’s territory with a more complete solution.

    Pandora should develop a cloud-based music purchase/storage product, like Apple’s, or it will wind up as a component of some competitor who does offer both sides of the equation, or it will wind up as a trivia question.

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    1. Paul: I’m on the record saying one of the coolest things about digital music was its ability to integrate discovery, consumption (listening in a variety of modes), sharing & self-expression, and commerce in a way that terrestrial radio, retail, or music mags never could. Yet companies have tried to do this for years, with little evidence that combining these experiences gained them much adoption (Rhapsody, Napster, LaLa,S Slacker, and now Spotify).

      I’m still a believer, but I think delivering a competitively priced or free standalone experience can still be a path to success.

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  5. Pandora needs to find ways to obtain more subscription users.

    I believe the Ad-supported users are self-sufficient to cover their streaming costs but they are significantly less profitable than paying subscribers. I did a little back of the envelope calculation and estimated that ad-supported users have a $0.21 contribution margin while subscription users bring in $1.76 (details here: http://t.co/1y6WkGy).

    To make money, I think Pandora needs to focus on increasing its paying subscribers… not just its audience.

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