Pandora Set to Expand Thanks to New Royalty Ruling

Ad Model Gets More Aggressive as Costs Fall in Line

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NEW YORK ( -- Less than a year ago, the fate of Pandora, a streaming radio site that reaches 30 million registered users and attracts 4 million unique listeners a month, was in Congress' hands. Like other online radio sites, such as AOL Radio and Yahoo Music, Pandora had to pay hefty fees for the rights to stream songs, often totaling up to as much as 75% of the company's revenue. But the July 7 ruling of the revised internet-radio royalty act not only reduces Pandora's fees greatly -- to 25% of revenue or a fee-per-song, whichever is higher -- but it also gives the company the chance to focus on its attempts to become the biggest alternative to traditional radio on the web.

Tim Westergren
Tim Westergren
"This lifts the single biggest dark cloud hanging over us now for two years," Tim Westergren, the company's founder and chief strategy officer, told Ad Age three days after the ruling. "Nobody has to spend our days reading about my latest quote in the paper about our imminent demise. There have been a lot of folks in the advertising industry that have been a little skittish about Pandora, knowing about its uncertainty. I know there's a lot of stuff we missed out on because of it, but we're hoping this will firmly plant us in the minds of advertisers now that we're here to stay."

Unlike its traditional peers at CBS, Clear Channel and AOL, Pandora has a still-fledgling ad model that, prior to last week's ruling, could only offset its increasingly expensive costs of music royalties so much. Advertising, which comprises 95% of the company's revenue, accounted for roughly $18 million in revenue in 2008, said John Trimble, the company's chief revenue officer. He expects that number to double by the end of 2009, with the company on track to becoming profitable by 2010.

Terrestrial scrambling
The company's expansion comes at a time when the terrestrial industry is scrambling to play catch-up. Clear Channel has seen major digital growth from I Heart Radio, a Pandora-esque streaming tool that has logged more than 2 million unique downloads on mobile phones. CBS acquired Last.FM, a competing streaming radio player that's been integrated into a growing online radio network that includes AOL and Yahoo's music players.

Although rumors of traditional radio partnerships -- or even mergers -- have surfaced over the years, Mr. Westergren is adamant about the company's independent status in the future. "We set out to build a big standalone company, and we want to compete with every form of radio out there," he said. "We want to be the world's biggest radio station."

Mr. Westergren is particularly protective of Pandora's role as many music listeners' top music discovery portal, and a major gateway to sales on Amazon and iTunes. More than 70% of Pandora's song library is independent, "music that's not getting played anywhere else," he said.

Patrick Reynolds, chief marketing officer of online-radio-measurement firm Ando Media, said that while Pandora maintains significant share of the online audio market, the new royalty ruling will allow it to be even more aggressive in growing that ratio as more players enter the market. "Now that it's safe to go back in the water, everybody that's a streamer -- big, medium and small -- can really build a business plan with a five-year horizon of what your variable costs are going to be," he said. "A lot of people were artificially suppressing growth because they had no idea how lucrative this business could be. There were a lot of people who said, 'I don't want to be in a small-margin business' who are now saying, 'I think I wanna make a go of this.'"

Ad-based growth
Although Pandora is a listener-curated online radio station, intended as a music-recommendation tool for national audiences, the site has found most of its recent growth due to local ad sales. Doug Sterne, Pandora's director-audio sales, said about two-thirds of Pandora's ad revenue comes from national and network budgets, while the remaining third is for geo-targeted local campaigns.

Mr. Sterne, who came to Pandora in late 2008 after a stint as Clear Channel Online's VP-ad sales, has seen an acceleration in the past year of radio-based agencies investing more in targeted creative messaging for audio campaigns. "We're delivering the same broadcast radio platform, just over the internet," Mr. Sterne said. "We want people to understand if you're the 100% share of voice in a 60-minute window, we'd like you to invest some time in what the creative might sound like."

Whole Foods led the new crop of ad deals with a targeted ad buy.
Whole Foods led the new crop of ad deals with a targeted ad buy.
Leading the new crop of ad deals was a targeted ad buy from Whole Foods, which ran a 15-second audio campaign targeting shoppers in the San Francisco area who lived within 7 miles of specific locations. The store was also able to air its ads by day-part to promote specials. "The primary objective was for listeners to see Whole Foods as a place where they could get complete meals," Mr. Sterne said. "In the morning hours, it promoted a sandwich special, in the afternoon, it was a fish special." The return on investment was significant enough that Whole Foods is renewing the campaign in San Francisco and expanding to Los Angeles.

Mr. Westergren, for one, hopes that even with the company's sustainability woes behind it, and a growing ad platform, that listeners won't become too fatigued by the growing presence of ads.

"It's a balance -- we work really hard to present advertising in kind of an elegant, well-integrated fashion," he said, adding that the site has parallels to Hulu in its limited commercial model, albeit with no pre-rolls for new audio streams. "Even with a successful audio product, you'll always have listeners who object to any kind of advertising. But if you get this for free, you're gonna get sponsors, so people understand that now."

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