Pandora Eyes Growth in Connected Car Market, Downplays Impact from Mobile Carrier Data Limits

Pandora’s goal is to be available in the U.S. and worldwide “everywhere you would get traditional radio,” Paschel said, but the car holds particular promise. He cited the various phases of Internet radio in vehicles, breaking out phase one as connection of a smartphone via Bluetooth or auxiliary jack where data can’t show whether the smartphone is being used in a car or not. In phase two, where the 85 vehicles fit in, Pandora is integrated with the infotainment systems of car makers such as Cadillac’s Cue. Users still pair through the phone in the Cue setup, but GM’s future connected car through the AT&T 4G network that’s set to launch with 2015 vehicles will take Internet radio to phase three of integration, where Pandora “won’t require your phone” but will operate seamlessly over a 4G chip in the vehicle, he said.

Citing the seven-year replacement cycle for a vehicle, Paschel said Pandora is excited about “long-tail growth opportunities” among new car buyers, especially with new car sales at a six-year high. He referred to a “snowballing effect” toward the latter half of the decade when consumers trade in cars for Internet-radio-equipped ones. Theoretically Pandora “could double market share just by getting [the service] into the car,” he said.

Globally, Pandora has its sights on having one billion users and to be “radio throughout the world.” Most of the 200 million registered users are in the U.S., but Paschel said the number of users could well approach a billion now “if we hadn’t started blocking IP addresses.” The service began blocking IP addresses in 2007 to be in compliance with international copyright law, he noted. The company has since re-launched in Australia and New Zealand and that region’s 27 million users “can become the blueprint for how Pandora can grow globally,” he said. The challenges are in royalty agreements, not in technology, he said. “It comes to understanding what the royalty rates are within a geography,” he said.

Generally around the world, radio pays a mid-single-digits percent of revenue to rights holders, Paschel said. In the U.S., however, radio stations pay “virtually nothing” to copyright holders, he said. Instead, Internet radio -- and Pandora represents 75 percent of the market -- pays nearly half of radio artist royalties in the U.S, he said. Pandora could enter other territories now, but it wants to structure royalty deals that would accurately allow revenue and costs to grow as a percent of revenue within those locations, Paschel said: “We can grow a business when you enter a new geography as a percent of revenue."

Paschel said the company hasn’t felt an impact of data caps from wireless providers on listening hours since AT&T first began limiting data usage two years ago. “It hasn’t been a problem,” he said, saying a listener would have to listen for 70 hours of Pandora streaming at 32 kbps at the standard mobile setting to accumulate one gigabyte of data usage. The average user listens to Pandora for 21 hours a month, and some of that is over Wi-Fi, he said.

On Pandora’s own 40-hour listening cap on free mobile listening set in February -- the second it has instituted in its history following a 40-hour desktop cap in 2009 -- Paschel said the mobile cap allows the “cost control” necessary in light of economic realities stemming from “lack of parity” on the royalty side. The company expects the cap to affect fewer than 4 percent of its user base, 80 percent of which is now accounted for by mobile devices. He said the controls were implemented now because Pandora wants to reinvest “high-usage spend” into other areas of the company such as expanding distribution capacity and local initiatives to accelerate revenue and investing in product and R&D. One of the challenges of the move was integrating with mobile platforms for a “seamless” user experience, he said. On iOS, for instance, users can either pay 99 cents to resume service through the end of a month or pay $3.99 a month for unlimited listening. Pandora wants to continue to provide “great revenue streams for artists,” Paschel said, but “we needed to control the cost side.”