Apple's internet radio move won't close Pandora's box

Stuart Lauchlan Profile picture for user slauchlan September 26, 2013

Apple has entered the internet radio market with its iTunes Radio offering, a move which caused many observers to cast a quizzical eye in the direction of Pandora, the market leader up to now in this sector.

But anyone hoping to detect signs of alarm or panic would be sorely disappointed as founder Tim Westergren demonstrated at a recent Goldman Sachs conference in New York where he defined Pandora's business model as being relatively simple:

"Principally an advertising supported free product supplemented by a pretty healthy subscription business.

"We’re not a premium business in the sense we’re trying to drive people to pay. We view that as an opportunistic part of our business and one that is a happy home for Pandora power users, but the real name of the game for us is delivering on the ad supported business, which increasingly is an audio ad supported business."

The plan is also to make Pandora an integral part of the internet of things. Westergren explained:

"We are working very hard on making Pandora ubiquitous. So over 1,000 devices now support Pandora, ranging from obviously desktop, laptop computers, blue ray players connected devices, refrigerators and I recently learned Jacuzzi now comes embedded with Pandora. So if you’re in the market for a Jacuzzi I recommend the Pandora embedded version.

"We’ve got a substantial part of our engineering team focused on getting Pandora embedded in as many places as possible. So if you step back and look at radio listening at large, half of it is in the car and the rest is essentially split up between the home and -- so about half of the rest home and then the remaining office and working on the go."

Tim Westergren

To capture the all important car and home markets, you need to go where broadcast radio has traditionally been:

"It's an enormous, enormous part of our story. It represents a big part of our engineering efforts. And I think it's a big source of differentiation for us. One of the great benefits of being such a large market shareholder - north of 70% of internet radio - is that there’s a lot of pull for Pandora from the devices.

"Whether it’s a blue ray player or it's a car, their consumers want Pandora on their products. So they actively work with us to embed it and they actively advertise us as a feature on their product. So we get this great benefit of distribution, along with free in kind marketing. There are some car ads right now that look like Pandora ads which are really, it’s great for us."


But with increased competition, not least of course from Apple's new iTunes Radio offering, the need for a clear differentiator for Pandora might become more important in the future. Westergren reckons it's already there:

"We build better playlists. It seems relatively simple on the surface and for a consumer, it just seems really easy Type an artist and it just plays music that you like almost all the time. But what makes that possible, what makes that first hour enjoyable as well as the 100th hour, is an immense amount of intellectual property."


Westergren flags up the Pandora Public Music Genome Project as an example:

"[This]is a database of songs, well over a million now, that have been individually analysed by a trained musician one song at a time, along as many as 450 attributes per song. So [it is] really manually detailed, like musical DNA, which we use then to put songs together into playlists.

"That's now supplemented by an immense amount of feedback data from listeners. North of 36 billion songs up and songs down that have been given across hundreds of thousands of stations. You put those together and I think it puts us in a great position to deliver the right playlist to individual users based on their individual preferences. I do think we do that better than anybody, including Apple."

Westergren makes an interesting claim when he argues that in terms of product innovation, one of Pandora's main contributions to the evolution of radio has simply been to make it simpler:

"What a listener wants when they go to Pandora is to hit a button and hear music they love. We do that superbly well I think. A lot goes into making that work that well. The playlist is a big part of it. The user interface is another part of it.

"The infrastructure that delivers the music is another one. We stream about the same number of hours of music that YouTube streams hours of video. So there is a lot of work that goes unseen."

Adding to advertising

But while simplicity may appeal to the listeners, the key to Pandora's longer term success is supplanting radio as the advertising medium of choice. Westergren asserts that it's a question of educating the media buying market:

"I think that we have a very attractive sales proposition vis-à-vis broadcast radio. That is a business that has historically not been very accurately measured or reported and certainly not targeted.

"We offer all those things and I think that's why you see really talented people coming over to sell here. I think when a broadcast seller gets Pandora's advertising portfolio, they’ve died and gone to heaven. So we're very competitive."

Pandora has begin to work with more traditional ad buying platforms like Mediaocean and STRATA which Westergren concedes is an important step into the mainstream:

"All buyers use more or less the same platforms, Mediaocean and STRATA, to measure, to validate radio station sizes and market shares.

"We have had a hard time getting onto those lists. There are a lot of people who don't want us on those lists, but we managed to do that.

"That has been pretty widely rolled out now. And I think this holiday buying season we’re the first real strong test case for the impact of that. But it's a key piece and I think it's going to accelerate it."

In a digital world obsessed with mobile content delivery, Pandora clearly has a strong story to tell, although Westergren isn't entirely convinced about the maturity of the market just yet:

"Mobile has gone from an experimental category to having a more significant share of a given budget on our fee. We sold that as an appendage to our web sale. The audience has now grown substantially and there are a handful of really, really large mobile publishers now that are all driving the market.

"So it's just time. I don’t think there’s a silver bullet. We obviously have to invest in technologies and products to make the advertising access on mobile effective. That doesn't feel like a big hurdle to us right now."

The rest of us

From a European perspective, all of this sounds enormously interesting, but purely theoretical for now as Pandora's (legal) reach remains limited. Outside the US, there has been expansion into Australia and New Zealand, but there's no sign of Europe listening in thanks to rights issues. Westergren recalls:

"When we first launched Pandora for 18 months you could access it from anywhere in the world. All you had to do is pretend you were a US resident and type in a US zip code. Our most popular zip codes for 18 months was 90210!

"It was growing very fast all over the world at a time when our catalogue was essentially English language only. It was really not ready. So we know the market is there. Unfortunately rights administration is just not a very healthy part of the music business. And so rights are granted country by country, territory by territory."

It's a frustrating state of affairs, both for potential listeners and clearly for Pandora itself. The risk must be there that Apple will get there first,  but Westergren remains outwardly phlegmatic about the prospect of increased competition:

"We've had competition in the past. When we launched, AOL, Yahoo! and MSN all had very large internet radio properties. They had personalised products. We just did it way, way better and now we've got eight years of added innovation and data and so on to make it even better. I think that's really where our confidence comes from.

"People are not very forgiving of a personalised radio experience. You have to really deliver a consistently good experience and if you don't people I think are impatient. Ultimately consumers decide this. I can say that till the cows come home."



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