Assessing the ad-supported digital-music-streaming landscape is like figuring out which sets to catch at Bonnaroo. From Pandora to Spotify to Clear Channel's iHeartRadio to Apple's new iTunes Radio, there are so many options for marketers. Too many.
Even Rdio, known for its clean design and subscription model, is planning to launch a free, ad-supported desktop version of its on-demand streaming service by the end of the year. "We wanted a perpetual free offering. We've seen as the market has evolved [that an ad-supported free service] drives virality and an active user base," said Rdio CEO Drew Larner.
For the latest generation of digital-music services, it's becoming clear that paid subscriptions won't cover content-licensing costs. Pandora, for example, expects 80% of its revenue to come from advertising. The internet-radio pioneer and its brethren hope they can divert a swath of local-radio ad dollars their way. But for that to happen, they have to get bigger in local markets and offer mobile ads tailored to local audiences. Kinda like radio.
But going free and ad-supported means more users are splitting their digital listening across multiple services like Spotify, Pandora, iHeartRadio and now iTunes Radio.
"We think the marketplace is getting cluttered, and there is a lot of noise," said Erin Clift, Spotify's VP-global marketing and partnerships. She was quick to point out that many of the services are devoted to digitizing radio, whereas Spotify features radio in addition to its better-known on-demand service.
EYES ON RADIO
While radio may not be core to Spotify's overall business, it is the centerpiece of the company's mobile-advertising business. In fact, the only free ad-supported service Spotify offers on mobile for its U.S. listeners is radio, even though Spotify's VP-North America Ad Sales Brian Benedik conceded that he gets "asked about mobile all the time."
Indicative of radio's importance to the future of Spotify's advertising business, Mr. Benedik cited from memory that the U.S. AM/FM radio market is a $15 billion business, with 75% of that spending going toward local advertising.
"The cash register rings at the local level," said Kathy Doyle, exec VP-managing partner-integrated investment at UM.
But not every digital-music service plays at that level. "Right now Spotify is in a growth stage. They look strong in adults 18 to 34 [years old] in the top 10 markets. Other than that there's not enough scale," said Lauren Russo, senior VP-director of audio and promotions at Horizon Media.
That is why Pandora, with its 72.1 million monthly active listeners, holds a higher profile on Madison Avenue than Spotify and its more than 24 million monthly active users (6 million of whom pay for the ad-free version).
Pandora also earns advertisers' affections for its level of targeting, which combines users' registration data -- age, gender and ZIP code -- with time, day and device as well as its so-called Music Genome Project. The 13-year-old program is a music taxonomy compiled by more than 25 analysts who evaluate each song coming into Pandora based on as many as 450 different musicological attributes, said Pandora Senior VP-Strategic Solutions Heidi Browning Pearson.
"Pandora really stands behind the Music Genome Project. That's something someone else has not invested in," said Ms. Russo.
Spotify is beginning to do so. "We have this treasure trove of data that we are right now in real time trying to organize how to package and how to work with advertisers around that," said Mr. Benedik.
THE APPLE FACTOR
Spotify isn't only catching up to Pandora, but to Clear Channel. The radio giant doesn't break out monthly listeners for iHeartRadio, but claims more than 35 million registered users and more than 60 million monthly unique visitors to Clear Channel's digital properties, which include but are not limited to iHeartRadio. IHeartRadio's advantage comes from Clear Channel bundling its AM/FM advertising deals with the digital service.
That packaging may not seem important in light of radio listeners' migration to digital services, but put that shift into perspective. EMarketer estimates the digital-radio-listener base is 147 million Americans, or 46.5% of the population, this year and reach 179.2 million in 2017. By comparison, Clear Channel's AM/FM radio stations alone total 243 million listeners a month.
Yet even Clear Channel, and especially Pandora, will need to contend with Apple's entry. Because any computer, smartphone or tablet with iTunes will receive access to iTunes Radio -- and considering the more than 200 million iPhones, iPads and iPod Touches sold this year -- essentially overnight iTunes Radio's audience could rival any other's, not to mention the cost to reach that audience.
"From what I'm understanding based on initial conversations, [the ad rates for] iTunes Radio is in the ballpark of Pandora and in some cases even lower," Ms. Russo. "I haven't done anything with them yet, but I do think they've done their homework.