Pandora skips to the next track as advertising revenue growth becomes focus

It would be fair to say that most recent analysis of the progress of online music pioneer Pandora has been downbeat at best, as the firm saw increased competition coming from the likes of Apple and Spotify.

There was more bad news yesterday when it was announced that the firm was shutting down its service in Australia and New Zealand with immediate effect, retreating to the US homeland, now its only operating market even as other music services plough ahead with international expansion.

But with CEO Tim Westergren stepping down from the top slot, it’s clear that a shift in strategic direction is on the playlist, with a focus on getting more revenue from advertising aimed at existing users of the free Pandora service, rather than growing paid-for subscriptions.

Interim CEO Naveen Chopra told Wall Street analysts this week that the intention now is to get people on the free service, tap the advertising opportunities there and then look to upsell the premium service to a select, qualifed audience:

Meeting our ambitions with regard to user growth won't be an overnight endeavor. But now with key pieces in place, we are laser-focused and well-equipped to grow active users, which facilitates growth in our advertising business and the opportunity in subscription.

Pandora has 76 million free users - down for the third consecutive quarter - but only 4.8 million paid subscribers, although the latter number represents a 24% year-on-year growth, albeit from a low base. The top tier premium services at $9.99 per month only managed to add 150,000 new subscribers during the most recent quarter, bringing the total to 390,000.

Compare that to Spotify which said this week that it has added 10 million new subscribers over the past four months, bringing its total to 60 million across the 60 international markets in which it operates.

But for Pandora, it’s all about quality over quantity now, said Chopra:

[The] strategy is much more focused on building the broadest possible audience as opposed to a strategy that was focused on, or I should say relied very heavily on, pure subscription growth as a way of driving the business forward.

The view now is that we need to develop as big an audience as possible across multiple forms of the service, both the ad-supported and subscription. And the most efficient way to do that is to bring people into the ad-supported product and then use our on-platform capabilities to find the people for whom Premium is really the right place to be.

Changes

That seems a sound enough theory. Pandora’s net loss widened year-on-year to $275.1 million from $76.3 million for the quarter ended 30 June 30. Pandora's advertising revenue rose nearly 5 percent to $278.2 million in the second quarter, but subscription revenue of $68.9 million fell short of Wall Street expectations.

Another indicator of altered priorities ahead is the decison to divest the Ticketfly operation, in order to focus more on advertising opportunities in the core service. Chopra said:

These changes present the opportunity to refine our strategic, operational, and financial objectives in light of evolving industry dynamics and changing consumer behavior. We have built a unique ecosystem at Pandora, a very large base of highly engaged listeners that power a compelling advertising business that has significant growth potential thanks to a renewed focus on technology and innovation.

In addition, we now have the ability to provide fully on-demand listening through our subscription products. These services help retain and grow listeners, in particular younger demographics, and enhance their engagement on our platform in a way that is highly accretive over the long term.

There will also be a re-examination of the types of content that Pandora provides to its audience, with a premise that there are unexplored opportunities out there, said Chopra:

Pandora today is entirely a music-based service. There are a lot of other forms of audio content that are very important to our listeners, many of which have rapidly-growing audiences associated with them. There's all sorts of content on terrestrial radio that doesn't exist on Pandora today, as one example.

There are also a lot of digital forms of content, podcasts perhaps being one of the most prominent, where we have a pretty limited amount of content as part of our service. So those are the kinds of things that we're looking at how we can develop in order to continue to expand our audience.

As for the decision to bail out of Australia and New Zealand, Chopra denied that this represents an abandoning of global expansion ambitions:

What I don't want people to conclude is that the decision with respect to Australia and New Zealand is a proxy for how we look at international more broadly. We continue to believe that there is an interesting international opportunity for Pandora. But the fact is, we believe the near-term opportunity in the United States is substantially bigger and requires even more of our focus. This was really an issue of focus, not an issue of opportunity.

In addition, there are some unique properties about the Australia/New Zealand market. It is not a particularly large market. We did not have at the current time an easy way to bring our full suite of products there. And when you think about how we are articulating our strategy even in the United States, it all relates to the ecosystem and being able to put forward a powerful and a unique ecosystem that serves listener needs on a lot of different platforms, a lot of different devices, a lot of different types of listeners. We are not in a position to do that quickly in Australia and New Zealand, therefore, we decided to back off on that. But it is still something that will be on our radar screen as we get some of these other pieces in place in the US.

My take

With Westergren stepping aside for the second time, the roots of a modified strategic direction are starting to be seen. It will take confirmation of a full-time replacement in the top seat for this to become locked-in. However the Austalia/New Zealand retreat is spun and however pragmatic the decision is, it does still look bad. Still, on to the next track.