The future of Pandora: Looking pretty iffy
It pioneered the idea of online radio and it's got a huge listenership
February 19, 2016
By the editors of Media Life
This is one in a number of stories on radio in Media Life’s ongoing series “The new face of radio in America,” examining all the changes taking place in the medium. Click here for earlier stories.
There comes a moment in the life of every media company where it faces a challenge it must overcome or die.
Some excel in this moment – witness Facebook and for that matter Google and Netflix. They were based on smart ideas, they had the right technology. They succeeded by adapting to their marketplaces, changing as their marketplaces changed.
But others struggle. MySpace never figured out how to evolve, the same with Yahoo.
Pandora has arrived at such a moment.
The pioneer in online radio has a huge number of subscribers and brings in substantial advertising, but it isn’t making money. It’s 16 years into its existence and has yet to make a sustained profit.
Simply put, Pandora’s business model doesn’t work.
Its very popularity works against it. The more songs played by subscribers, the higher the payout in copyright fees, eating into revenues. It’s wrangled breaks on those fees it pays through Soundexchange, a nonprofit that collects royalties for the music industry, but it recently lost a bid to further trim those fees.
Advertising has not been able to keep up with those rising costs.
It’s also being challenged by newer entrants like Spotify.
When reports surfaced earlier this week that Pandora was on the block, it was hardly a surprise. Though analysts say Pandora still has potential, something has to change, and soon.
“Pandora has opted to invest heavily in ad sales infrastructure, as well as strategic investments, in order to pursue its long-term vision,” observes Mark Mulligan, managing director and analyst at MIDiA Research.
“Pandora’s business model has the potential to be much more profitable than Spotify’s, due to the different rates it gets from Soundexchange, while Spotify has to license directly from labels as it is fully on demand while Pandora is a semi-interactive radio service.”
Pandora needs to figure out how to make that happen.
Another problem is that subscriber growth has stagnated as its competitors surge ahead. Pandora has 80 million subscribers, and almost all listen for free in exchange for hearing ads. Some 4 million are paid subscribers to its ad-free service.
Spotify saw a 40 percent rise in free subscribers during the second half of last year, and Apple Music has amassed a reported 6.5 million paying subscribers, passing Pandora’s paid base in just nine months.
“Pandora’s U.S. listener growth is slowing at just the time Spotify and Apple Music are growing quickly,” Mulligan says.
User control may be the issue most hampering Pandora’s growth.
While Pandora, Spotify and Apple Music are lumped together as direct competitors, they use very different technologies that offer very different user experiences.
Spotify and Apple Music allow users to curate playlists, assembling favorite songs and being able to play them as they choose. Pandora is a streaming service offering listeners radio channels based on their likes and dislikes.
“Although they are very different models, Wall Street views the streaming model as a single whole and thus Pandora lacks a growth story in a dynamic growth market,” Mulligan says.
Pandora is attempting to address its technology gap. Last year it acquired Rdio for its on-demand capabilities, with the idea of integrating them into its offerings.
Still, while adding new features can work–Facebook and Google have done particularly well at this over the years– it’s quite another thing to attempt to rejigger one’s core business model, which is what Pandora may have to do to compete effectively with its newer rivals.
Who would buy Pandora if as rumored it’s truly on the block? One rumored suitor is Spotify, which would gain a huge subscriber list while wiping out its biggest competitor.
Still, whatever happens to Pandora, it’s played a huge role in online music, and it will continue to.
“Pandora is the future of radio, whether it is Pandora that makes that model work or someone else,” Mulligan says.
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