Pandora and Spotify face the music in hard-to-monetize subscription business
- Summary:
- Pandora and Spotify - rivals in the streaming music business, both struggling to find monetization models that will stick in a subscription economy.
But away from the bottom line numbers, the issue for both Pandora and Spotify is one of monetization of their services - and that’s proving an ongoing challenge.
Pandora's advertising revenue fell 3.9% to $214.6 million, but it’s now got 5.63 million subscribers to its Pandora Plus and Pandora Platinum paid services, That’s 19% more than it had this time last year and accounts for a subscription revenue rise of 63% year-on-year.
It’s also just made what could be an important ad tech acquisition in the shape of digital audio ads firm AdsWizz, which Pandora CEO Roger Lynch pitches as an important building block in a planned transformation of the overall business model:
Music is at the core of what we do. Whether subscription or ad-supported, we connect consumers to the music and the artists they love. Increasingly, the new era of audio means using our technology to drive an engaging consumer experience across all types of audio content. It means ensuring that any content on our platform is easily discovered and socialized, be it a song, a podcast, or a new album. It also means providing brands with an end-to-end toolset that allows them to meaningfully connect with listeners everywhere, regardless of whether they experience Pandora on an iPhone, an Alexa-enabled speaker, or any other device anywhere they are.
Our decision to acquire AdsWizz positions Pandora to be at the center of this expanding and evolving digital audio marketplace. The opportunity is significant, especially with the potential for a good portion of the $28 billion global radio advertising spend to move to digital audio. We intend to lead this market and provide buying and selling solutions across multiple ad formats for multiple publishers worldwide. AdsWizz puts us in the best position to do just that.
Hmmm. Maybe, but a lot the same things were said around Pandora’s earlier acquisition of Ticketfly - pitched back in 2015 as a game changer - and that ended with the firm being flogged off to EventBrite two years later!
But Lynch is doubling down on this latest move:
We needed to improve our advertising technology position, specifically in programmatic, to take advantage of the significant opportunity in digital audio. The acquisition of AdsWizz will be a big step and signals a clear acceleration of our ad-tech capabilities, allowing us to transition from the largest digital audio ad publisher to the largest digital audio ad platform.
We believe that combining Pandora's scale and data with AdsWizz technology will allow us to accelerate growth in digital audio advertising. AdsWizz has customers in 39 countries and offers a full stack of tools and services, ranging from programmatic audio on both the demand and supply sides, to ad serving technology, to ROI measurement, to podcast tools and self-serve capabilities.
Not that those customers will necessarily stick around, of course. Lynch concedes:
I'm sure we'll lose some of them. But I think there is benefit in those publishers staying with AdsWizz because they have the largest platform. And now as we start to put our inventory in with AdsWizz, they have by far the largest amount of digital audio inventory to monetize. So when you're creating marketplace, the buyers will want to be where the inventory is and AdsWizz will have that inventory.
Ad tech plans
There’s a lot riding on this one, as Pandora CFO Naveen Chopra makes clear:
Voice commerce is projected to grow to be a $40 billion industry by the year 2022, up from $2 billion today. These are exciting tailwinds for digital audio advertising, which itself grew 42% year over year in the first half of 2017. And AdsWizz expands the ways Pandora can participate in this growth.
Our plans for AdsWizz begin with programmatic audio, which is a small ecosystem today because large amounts of supply have not been aggregated in a single marketplace. With AdsWizz, we will be taking Pandora, the world's largest publisher of digital audio advertising supply, and aggregating it with inventory from the world's other leading audio publishers.
We plan to use AdsWizz software to accelerate our ad tech roadmap. This will not only include programmatic functionality, where AdsWizz is already powering our beta, but also augments our efforts on new ad formats, self-serve, sales automation and ROI measurement. In some of these areas, we think our development roadmap can be accelerated by as much as two years. We also believe that continued investment toward this roadmap will benefit other publishers who use the AdsWizz platform.
On the cost side, AdsWizz will bring very strong engineering talent, primarily in Romania, and we plan to expand the size of that team. While in the short-term this means an increase in product development expense, over time we should see benefit from access to more talent than our current development hub in Oakland and at lower costs. So, clearly AdsWizz is a very important strategic opportunity for Pandora. It should boost overall advertising results over time.
In all of which, the two most important words are ‘over time’. This is not going to turn around Pandora’s fortunes overnight.
Same troubles
Over at Spotify, the user total is now 170 million worldwide, but less than half of those are actually paying any money for the service. The number of premium member subscribers is 45% up from a year ago to hit 75 million. That’s a big challenge for CEO Daniel Ek who identifies three aspirational growth mechanisms:
First, it’s the premium offering. So our free product drives premium subscription growth and it leads to better personalization and drives use among younger demographics with greater potential lifetime value.
Second, our unique embrace of ubiquity across all platforms. We see the world dividing into multiple platforms and Spotify is really the only player that works across all of them globally and this makes it easier for us to grow our business in both existing and new markets.
And then, thirdly, personalization. This is our ability to deliver a personalized user experience that enables us to build deeper engagements and enable more demand creation.
Once you’ve got your head around what a “unique embrace of ubiquity” means - anyone? - then it’s time to swallow another fairly incredible claim:
We don’t see any kind of meaningful impact of competition.
Come again? No, he's serious:
In fact, when we look at this, we don’t really think this is a winner takes all market. In fact, we think multiple services will exist in the market and we are all kind of in a growing market and we are just focused on growing that market and capturing more market.
Ek adds:
Music is one of the largest art forms in the world there is and already today, if you would look at radio as a proxy for the billions of people who listen to radio of which the primary reason to listen to radio is music, we think that the online opportunity in music is billions of people and that a quite significant chunk of those could meaningfully contribute back to the music economy.
My take
The third party in this menage a trois is, of course, Apple, which recently turned in a stat of 40 million paid subscribers for Apple Music, a level achieved in a lot less time than either Pandora or Spotify. If Ek genuinely doesn’t see the competitive threat out there, then he’s in for a rude awakening.
As for Pandora’s ad tech play, this is a savvy roll of the dice and one that Lynch has executed at a previous company. He’s the main driver behind the AdsWhizz purchase, so he carries the can or gets the plaudits depending on how things play out over time.
Overall both Pandora and Spotify have the same challenge - how to monetize a service in a subscription economy when people are used to getting it ‘for nothing’ in the legacy radio world. At this point, it’s unclear as to whether either has the answer, although Pandora’s new-ish CEO seems to have a clearer future vision than the Spotify co-founder.