Pandora’s Remix

Once a pioneer in the music-streaming industry, the company has lagged behind hipper rivals like Spotify. But it’s determined to get its mojo back.


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Founded in 2000, Pandora Media got started collecting data about songs based on musical characteristics, and it built a repository for that information called the Music Genome Project. For a time, the company sold music recommendation services to businesses that included Best Buy. Then in 2005, it launched an online radio service and rose to huge popularity on the basis of its ability to deliver songs based on a user’s preferences, expressed in part via a “thumbs up” or “thumbs down” function. The company went public in 2011 and reached a peak valuation in February 2014, when the stock topped out at more than $37 a share.

But Pandora’s fortunes began to change in 2011 when Spotify, which was founded in Sweden, introduced a free music service in the United States along with a paid version that gave unlimited access to 30 million songs.

Until this year, Pandora only offered customized “radio” stations based on a user’s music preferences. Users could not choose individual songs and were limited in the number of songs they could skip.

The enormous growth of Spotify’s $10-a-month subscription business showed there was strong consumer demand for more listening control. Spotify now has 140 million users in 61 markets around the world, including 80 million who use its free, ad-supported service. The company had 63 million unique visitors in the United States in July, up from 54 million at the same time in 2016, according to the tracking firm ComScore.

Besides sheer numbers, another potentially worrisome factor for Pandora is that Spotify is proving more popular with millennials. “Demographically, Spotify skews younger than Pandora, especially among 18- to 24-year-olds,” wrote Adam Lella, a senior analyst with ComScore, in an email to the magazine. “Pandora, meanwhile, gets a huge portion of its audience (57 percent) from users age 35 and older.”

Mark Mulligan, an analyst with the technology research company MIDIA, noted in a June 29 blogpost about trends in the United Kingdom that “teenagers have taken the Spotify brand and made it their own.”

Edison Research in the United States similarly found in a national telephone survey of people 12 years old or older in January and February that Pandora has been losing appeal to young listeners, while Spotify has been snagging them. Asked what music service they used in the previous week, only 30 percent of people age 12 to 24 said Pandora, down from 45 percent in 2015. For Spotify, the percentage rose from 17 to 38.

Still, Pandora remains top dog in terms of U.S. audience sizes, and it has the third-highest U.S. engagement levels of any internet service after Google and Facebook, according to ComScore.

But it also has never made a profit, and its losses have risen dramatically, hitting $407 million for the first half of 2017, despite beating analysts’ expectations with a 10-percent increase in second quarter revenue. That follows a $343 million loss in 2016, which was more than double the loss for 2015. As of Dec. 31, the company had an accumulated deficit of $709.6 million.

To be fair, Pandora officials point out that it’s not like everything is clear sailing for Spotify, which, like other companies (think Jay Z’s Tidal) has also struggled to build a profitable streaming business. Spotify, which is rumored to be preparing to go public in the near future, disclosed in June that while it grew revenue by 52 percent last year to $3.3 billion, losses mushroomed from $257 million in 2015 to nearly $600 million in 2016.

A key reason why Pandora has been spreading red ink is that in order to offer on-demand streaming, the company signed direct licensing deals in 2016 with music industry players that significantly increased royalty payments for nonpremium services as well, said Michael Pachter, a noted analyst at Wedbush.

The new licensing deals also increased the number of songs in Pandora’s catalogue from 2 million to 40 million. But the deals added to Pandora’s content acquisition costs: For the first half of 2017, they rose 10 percent by more than $35.4 million to $383 million. In addition, the new licensing contracts include minimum payment guarantees—regardless of consumption or user numbers—and at the end of June, these future commitments totaled $617.2 million.

Previously, Pandora insisted on paying lower statutory rates set by the federal Copyright Royalty Board as it built its model around advertising revenue. But the music industry wanted Pandora to pay higher fees, and relations became adversarial, with Pandora at one point buying a small South Dakota radio station in a bid to get lower rates.

Spotify and Apple, on the other hand, signed direct licensing deals and grew to massive size, after which Pandora made big concessions in order to get into the on-demand market. But the expensive licensing deals pushed back the time when it might become profitable.

“Investors didn’t like that,” Pachter noted.

Pandora’s stock took a dive last fall and has not recovered. It stayed below $12 the entire second quarter, sinking to a low of $6.91 in June.

The stock’s fortunes are reflective of outside perceptions about the place Pandora finds itself in today. San Jose-based PayPal in May filed a lawsuit accusing the streaming pioneer of copying its logo last October and suggesting that Pandora was desperately trying to take some of PayPal’s luster to ward off its problems. Pandora “faces overwhelming competition from Spotify, Apple Music, Amazon Music, and other successful streaming platforms,” PayPal alleged in its suit, which was lodged in federal court in the Southern District of New York. “It was against this backdrop that Pandora deserted its longstanding logo and latched itself onto the increasingly popular PayPal logo as part of its efforts to catch up to its competition.”

Pandora is hoping that new CEO Roger Lynch will not only help steer the company clear of the PayPal litigation but reinvigorate its innovative, entrepreneurial spirit.

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