Pandora Enters New Phase of Ad-Based Business With Integrated ‘Promoted Stations’

Pandora’s new advertising program, Promoted Stations, is an effort to “connect advertisers in a more native environment,” said Dominic Paschel, Pandora vice president-corporate finance, on a webcast of the Wedbush Transformational Technologies Management Access Conference Wednesday. Kleenex, Skechers, StubHub, Taco Bell and Toyota are among the first 10 national advertisers to join the program, currently in a beta launch, designed to help drive advertisers to custom content, the company said in a news release.

The custom stations will be added to listeners’ station lists and marks the first time Pandora has integrated an advertising product within a listener’s station list, it said. Roughly 10 percent of Pandora’s 76 million monthly users are part of the beta launch. Pandora, which has made no secret of its desire to be primarily ad-supported, is “relentlessly focused on advertising solutions that enhance both the listener and advertiser experiences,” said Lizzie Widhelm, vice president-digital advertising. The program will “make it easier for listeners to explore the unique content” it creates with sponsors and will give them the chance to extend the reach of their content and “the time spent with their brand,” Widhelm said. Pandora will add more brands to the beta rollout to test positioning of promoted stations, and listener exposure to promoted stations “will grow throughout the year” as the company “fine-tunes the user experience,” it said. Promoted stations will feature the “personalized listening and advertising experience” that users have on Pandora stations, it said.

A company spokeswoman told us the beta partners were selected because they are some of Pandora’s national clients and it wanted “a variety of industries to be represented.” The company isn’t discussing plans for rolling out the program to additional users, nor did the spokeswoman say how the 10 percent of beta users were selected. Those taking part in the program will have the promoted stations “auto-populate, one at a time,” under the “Stations You Might Like” section, which will only promote one station at a time, she said.

On programming under promoted stations, the spokeswoman said Pandora will play different songs according to the brand’s objectives in tailoring a sound for their brand and reaching a desired audience. “StubHub’s Next Stage” channel, for instance, features exclusive content such as interviews and songs from Tokyo Police Club, she said. Kleenex’s station has country songs by artists including Jason Aldean and Kelly Pickler. The Taco Bell “Feed the Beat” station plays artists including The Front Bottoms. Pandora “helps and empowers marketers to be the executive producers of their brand’s musical personality,” she said, and each brand’s ad experience is customized within a station. She didn’t say whether there’s a means for advertisers to interact with listeners.

Paschel said at the investor presentation that Pandora wants to maintain an 80/20 ratio of ad-based versus subscription-based listeners. While “we look to support both,” he cited research saying “the vast majority of the U.S. population isn’t willing to pay for an ad-free experience.” Pandora wants to be ad-supported for the bulk of its listening hours because there’s an addressable $50 billion advertising market, he said. Paschel said the company is on track to reach its goal of $1 billion in total annual revenue. Revenue in the quarter ended March 31 was $194 million, according to its 10-Q filed with the SEC.

Pandora, which compares its listener numbers to broadcast radio for advertising revenue purposes, can offer additional opportunities for advertisers through its Internet-based infrastructure including “visual, video and audio tools,” Paschel said. Its RPM (revenue per thousand listeners) is $44, compared with LPM (licensing cost per listener) of $22, he said. That compares with a year-ago RPM of “the low 20s,” he said, which “didn’t give us a lot of gross margin leverage to reinvest in the business.” It has begun to build out its local ad sales team to convert its listener base numbers to advertising revenue, he said. He cited one market, Denver, where Pandora listeners outnumber the city’s No. 1 broadcast radio station by 200,000 listeners. Total number of registered Pandora users is 250 million, he said.

On the increasing competition in the Internet radio industry, Paschel cited Triton Digital data pegging Pandora’s share of the Internet radio market at 78 percent, compared with Slacker at 3 percent and Clear Channel’s 11-12 percent share with iHeartRadio, which “probably spent more than $100 million to market it.” Pandora’s power is due to its algorithms that use metrics including time, location, gender and age, which help place listeners into some 50 different profiles used to create a customized listening experience, he said. One user with a Calvin Harris station would be “different from my Calvin Harris station,” he said, because each user’s feedback would be different.

Pandora sees its biggest growth opportunity in the automotive and smartphone segments. The company’s priority is to grow the listening hours of its active users and is targeting the 260 million smartphones that eMarketer has forecast to be in use by 2016. Pandora historically has been connected on one out of every two smartphones in the U.S., so it has its sights on a listener base “north of 100 million.” Cars will help drive that growth, he said. Smartphones in cars account for a high rate of listening hours in vehicles, but Pandora has no way to know whether a listener on a wireless data plan is using Pandora on a street or in a vehicle. As more connected cars come out with their own data plans, Pandora will see more vehicle-specific activations, he said.

Paschel said as the Internet of Things “becomes more pervasive, so does Pandora’s ability to be utilized within that.” Even some Jacuzzis now come with Pandora, he said, and “the attach rate is high.”

Licensing costs remain a sticking point in the music industry, and Pandora is about to enter a rate negotiation phase with the Copyright Royalty Board, which sets compulsory rates for webcasters, Paschel said. “We believe there will be an economically rational outcome,” he said. Despite some “public jockeying and bickering” from the music labels’ PR side, Paschel cited a thought process “that hopefully has evolved” where labels understand that Pandora wants the industry to be “very successful.” More conversations are taking place that are “at least conditioning people that we want to have productive relationships with everybody whether that means the compulsory side or that means direct deals,” he said.

Pandora is “willing to consider everything … anything that can make the ecosystem successful,” Paschel said. The compulsory structure is beneficial in cases where Pandora currently holds rights that on-demand competitors don’t have, he said. “We could play the Rolling Stones before Apple ever had the Rolling Stones under the compulsory structure, so there’s some benefit to retaining that,” he said. In 2013, Pandora paid $344 million in royalties, “more than half the revenue that SoundExchange is now getting” before disbursing that money to copyright holders, he said. “We're one company with 9.3 percent market share. We're writing meaningful checks and we want to have meaningful discussions.”