On the one hand, total revenue for 2017 rose from $1.38 billion to $1.46 billion, but full year losses jumped from $343 million to $518.3 million.
For the fourth quarter, there was a 25% increase in paid subscribers to the Pandora Plus and Pandora Premium services, which drove 63% growth in subscription revenue to $97.7 million.
While Pandora’s full year advertising revenue was essentially flat year-on-year at $1.074 billion, Q4 saw a decline year-on-year from $313.3 million to $297.6 million.
Meanwhile content acquisition costs continue to climb, from $734.3 million in 2016 to $804 million in 2017.
But Lynch is, inevitably, resolutely upbeat, predicting an imminent boom in the digital music sector. Given that Pandora has been around as long as it has, that’s got an inevitable whiff of ‘jam tomorrow’ about it, but he pitches:
Digital audio is on the verge of massive growth. Americans listen to an average of 4 1/2 hours of audio a day. And in the past two years alone time spent listening to music grew about 40%. This trend is going to continue upward as we see explosive growth in connected and voice activated devices and rapidly increasing consumption of other forms of content such as podcasts.
To put it in perspective, we expect one out of every two people will have a connected device in their home by 2022, and this will encourage incremental audio listening. These trends are early signs of a broader sea change in the world of audio. Just like broadcast video, newsprint and most other forms of media, audio is transitioning from a one to many broadcast experience to a one-to-one model with personalization at the core. This means the $16 billion terrestrial radio market will increasingly move to digital models where listeners enjoy a better experience and advertising can be targeted and data-driven.
OK, that’s fine, but how does that square with the flat ad revenues coming in? It’s about getting the business model right, according to Lynch, citing the introduction towards the end of 2017 of a Premium Access offering:
Premium Access is a product that addresses the largest reason listeners use other services, they want to listen to a specific song or artist, but can't do so without a subscription. With the launch of Premium Access, Pandora users can now unlock a window of robust on-demand music listening in exchange for viewing a short video ad.
They are able to search for a specific song or artist and share direct playlist links with their friends. This not only delivers a more complete experience to our listeners but it opens new promotional opportunities for artists to feature their latest tracks and albums. And it also unlocks new rewards-based video inventory for our advertisers.
With this new product offering, we now have more compelling and complete functionality in our mobile ad-supported service than any other competitor. Premium Access also represents the simplest and easiest way to try Pandora Premium for a limited period of time, an experience that we expect to become a highly effective acquisition channel for our subscription service.
So it’s essentially a ‘suck it and see’ offering designed to kickstart the Pandora Premium category, which hasn’t exactly taken the world by storm since its introduction. Lynch insists that the early results coming in from Premium Access are encouraging:
We're seeing higher repeat sessions among Premium Access users, more use of Premium Access by younger users, and better conversion to our Pandora Premium subscription product, especially by younger listeners.
The other mission for Premium Access is to stop existing users from drifting away to other digital audio providers. This has been an issue, admits Lynch in a moment of candour. He has his own theory as to what the cause of the problem has been:
The number one reason…Pandora listeners started using other services like YouTube or Spotify..four of the top five reasons, if you looked at the surveys when we surveyed former listeners, are all restatements of the same thing, which is ‘I couldn't play the song or album or playlist that I wanted’, because of the lean back nature of the original Pandora products. We solved that on December 19 when we launched Premium Access. So from a reason why people would go to other services, we just plugged that hole.
We also created a whole new opportunity for us on the marketing side…a lot of like what we did at Sling TV, what we call tune-in marketing, using content to drive activations.
We have that ability now, because with Premium Access, we can bring someone, market them whether it's on Facebook or Twitter, wherever it is using the data that we have. Remember, we have hundreds of millions of accounts that have been created. So we have personal preferences on hundreds of millions of people in the U.S. We can market to them using that data about specific content, bring them on to the platform and let them play the content. That was something we couldn't do before.
So we plugged the hole in terms of why listeners leave and we also created new gateways that, as we build out some of the marketing technologies, they are going to be able to pull those levers in a lot of ways that will drive engagement back to our platform.
There are plans to refocus marketing spend as well:
It is going to be skewed much more heavily than it has been in the past to performance-based marketing. So it's what I call doing personalized marketing at scale. So, creating the technologies and the capabilities that connect our data with our new product capabilities and marketing technology tools that allow us to do outreach at scale and drive people on this platform. That's where we'll be spending.
There is also a need to drill down on monetization, admits Lynch, particularly around ad tech, with an increased focus on programmatic advertising.
In a new initiative announced this week, brands will be offered the opportunity to purchase premium ad space on Pandora via a private marketplace. Volkswagen is the first brand to sign up as a pilot, in a deal brokered by global ad giant Omnicom. Five to ten other Omnicom clients are expected to follow suit during the pilot phase, before a general launch.
As for content, Lynch is keen to expand beyond music and points to the podcast industry as a potential source of growth:
If you look at the podcast market today, it's growing quickly. In terms of revenue, it's not that meaningful yet and we think that the two big things that podcasts suffered from happened to be our two core strengths. That is, discovery and monetization.
If you think about how most people discover podcasts today, they go to a chart and see what's listed on the charts. There’s nothing personalized about that. That's a popularity contest. Imagine if you had to discover music that way or Pandora never created Music Genome Project that enables people to discover music. So we think there's a lot that we can bring to the discovery of broadly digital audio, but in particular podcasts.
On the monetization front that's obviously a core strength of Pandora. We’re about two thirds of the digital audio advertising marketplace and just our strength in targeting and data will be something that we think will benefit quite materially what forms a content like podcasts.
But going back to the ‘jam tomorrow’ undertones, this is going to be a long game. Lynch says:
It's not a big bang thing that you'll see short term, it's investment that we're making now. You'll see us increase what we're doing on podcasts. We have handful of podcasts today that will increase throughout the year. But there would be a lot going on behind the scenes in terms of investments to create the experience that I just described.
It’s far from clear what the future holds for Pandora. Wall Street was schizophrenic about the numbers this week, sending the share price down 11% at first before rallying. Lynch is saying the right things, but Pandora badly needs to start showing some consistent growth and stability across the board. How much longer it can cope with ‘on the one hand…but on the other hand…’ is a moot point.