How Pandora could raise its revenues

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