Disrupted Media – when disruptors get disrupted, you get Pandora boxed in


Pandora was a disruptor in the digital music sector, but is it now in danger of being itself disrupted by the likes of Apple and Spotify?


What happens when the disruptor becomes the disrupted? It’s sometimes difficult to recall, but once upon a time, for example, Oracle was a disruptor, coming into the market with its new-fangled relationship database model and driving poor old Cullinet with its ‘all anyone needs’ flat-file model out of business in the process.

Today Oracle is the establishment and we think about the likes of Salesforce and Workday and the other cloud pure plays as coming along as disruptors to threaten it. The pragmatic Larry Ellison is far more sensible than the dogmatic John Cullinane, insisting Canute-like that he could turn back the relational tide and drowning in the process. So it is that Oracle is disrupting itself and morphing into a cloud-centric company and the jury is still out on who the long-term winners are.

In this short series looking at digital disruption in the media industry, we’ve looked at two traditional entertainment powerhouses, 20th Century Fox and Disney, and how they’re reacting to the challenge from digital disruption. For this final article though, it’s a firm that is itself a disruptor, in this case in the music industry, that comes under the spotlight as it is itself put under pressure.

When Pandora first launched, it was a disruptor of the music business, perhaps controversially so if you ask some musicians or record labels, but it’s worked hard on establishing its respectable credentials. But what was once pioneering has been caught up with, and some would allege overtaken by, the likes of Apple Music and Spotify and left the disruptor playing catch-up.

The numbers coming out of the firm’s latest earnings statement make for some grim reading. Full year net losses doubled last year, $169.7 million to $343 million, while revenues growth has slowed, up 19% year-on-year to $1.39 billion. Those numbers might still sound impressive in a relatively nascent market, but here’s one to chill the blood – over the past two years, net losses have topped the half a billion dollars mark.

Meanwhile active monthly listeners for the last quarter of 2016 came in at 81.0 million. That’s down slightly year-on-year from 81.1 million in the comparable quarter in 2015. Apple Music added approximately 11 million new subscribers in 2016 to come to a total of 21 million, while Spotify added 15 million to hit 43 million.

There are positives, of course. Advertising revenue increased in the fourth quarter of 2016 to $313.3 million, compared to $269 million in the same quarter last year. Local advertising revenue accounted for 27% of total advertising revenue, and overall grew 26% year-over-year in the fourth quarter.

But against the general backdrop, it’s understandable that CEO Tim Westergren is now pushing a target of adding up to 9 million paying subscribers by the end of 2017. That goal, he reckons, is achievable thanks to the already-launched $4.99-a-month Pandora Plus tier and the new $9.99-a-month on-demand Premium product.

There’s a lot riding on the on demand Premium offering, clearly, as Westergren says:

In terms of Premium launch, we’re definitely going to make a statement. We have quite a bit of budget allocated to bringing this to market. We think we’re bringing something new to this space. We’re not coming to this with a ‘me-too’ product that’s going to look like the others. It’s something very different, and we have I think a very exciting plan to get that out there. So you can expect us to be loud and proud and broad come launch time. So, there’s a whole plan around that and we definitely will be investing after it.

We’ll launch the product in March and our roll-out sort of velocity really is contingent on sort of how good we feel about the product in the first few days and how quickly we can kind of turn-up the dial to broad accessibility, so just as we did with Plus. And in the case of Plus, we actually had the ramp shortened substantially from our internal projections, because the product was really holding up, so that’s our plan that’s baked into the model.

Broadest appeal

Once the firm has three offerings out there – including the free model – the hope is that that there will be ‘something for everyone’, expanding Pandora’s appeal to the widest possible consumer base. Westergren confirms:

Our ambition with listeners is to find the product that fits them, both as a consumer and their pocket book. We start with 100 million people every quarter on Pandora that we know a ton about, about their usage habits and in some cases they’re already paying.

So you have a large number of signals from them, I think about their propensity to be subscribers. If you think about our ambition being a lifetime value for a listener, this isn’t necessarily about jamming everybody into a subscription product if that leads to higher churn, that’s not actually a wise financial move.

It’s really about finding the nice, the perfect spot for them that leads to lifetime value and churn’s a huge part of that. So, if someone has a product they really want and they’re using it, and they’re happy with it, they’ll stay a lot longer and that’s where you get the good economics.

There’s a clear migration path being built here:

It starts with the ad-supported listener, then they go to Plus, which is I think a very attractive price point for folks. And Plus to Premium is a really easy jump for us. So you’re on Plus, to shift into a free trial of Premium is a nice elegant experience, where with doing very little modest upgrade on your product, you can suddenly start experiencing [a] whole new batch of features. And then with a trial that auto converts at the end, it’s a very seamless way to bring somebody up the ARPU curve. So I think we will just get better and better with each month at identifying who should be moved up, how to move them up and when to move them up.

He adds:

We will target listeners based on what we believe to be their propensity to subscribe and that is a data science task. There’s a large crew at Pandora that are already working on signal, understanding the propensity for people to subscribe and we’ll go after them. So it doesn’t necessarily mean someone’s using it the most, that’s certainly one of the signals we look at, but how you use it is equally important. So are you someone who goes offline a lot? Are you someone who keeps running out of skips? Are you someone who searches a lot for an individual song indicating you’re looking for sort of a play on demand? There are sort of numerous signals that matter for us.

And, of course, factored into this is how valuable are you as an ad-supported listener, which speaks to hours, control and other things. So, if you are difficult to monetize for some reason, you’re someone who we will probably make work harder for remaining an ad-supported listener on Pandora. So, it’s like a one gigantic math problem, but we have a lot of weapons to solve them.

Ultimately Westergren remains convinced that the disruptor will not become the disrupted in this instance:

This is not so different from when we launched Internet radio so many years ago. We were not the first company to launch Internet radio. There were some large players already there, all offering personalized radio, and Pandora came on the scene and we did it way better. We’re going to do the same thing all over again here.

My take

This is increasingly a competitive and contentious market space. Pandora is at a very interesting stage of its development, no longer the enfant terrible perhaps, but certainly not the responsible teenager. And as I’m sure we all remember, puberty was an awful time to endure.

Image credit - Pandora

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