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Smartphones Play to Pandora’s Strengths

A conversation with Tim Westergren, founder of the personalized service

Many conventional radio broadcasters are scared of Pandora Radio, with apparent reason. The site allows users to hear musical artists they love, plus other content with similar musical styles. It began as an offshoot of the Music Genome Project, in which a listener’s preferences are quantified and compared against a baseline of 480 distinct musical characteristics.

‘Pandora might be able to team up with broadcast radio stations, to better serve their local audiences,’ Westergren says. ‘After all, we’re both on smartphones these days.’ Pandora claims 80 million registered listeners to date and appears to be growing. Moreover, thanks to the iPhone and other smartphones, it is making inroads not only into offices and homes, but into cars. The Internet radio company’s content can be accessed on mobile devices plugged into sophisticated new infotainment systems that are appearing in automobiles.

The Los Angeles Times quoted Pandora founder Tim Westergren at the 2011 CES saying that in-car smartphones “changed the whole equation. Now, if you want to be a radio service, that’s half the market. It feels like we’ve reached critical mass. … We want to be in every single car on every single phone.”

Such is Pandora’s success in delivering “personalized Internet radio” that the company recently announced plans to go public. The money it takes in presumably will only help Pandora increase its reach into broadcast radio’s traditional turf.

This said, the company has had its challenges. Pandora narrowly avoided shutting its doors in 2009 until royalty negotiations with performance rights organization SoundExchange went well enough for Westergren to decide to hang on.

To offset royalty costs, Pandora Radio decided to start charging a 99 cent monthly fee to people who listened more than 40 hours per month. It also had to limit its reach to the United States. Meanwhile, it lost $16.8 million in fiscal 2010 (on revenue of $55.2 million) and $300,000 in the first nine months of fiscal 2011 (revenue $90.1 million).

Is Pandora broadcast radio’s worst nightmare? We asked Westergren.

Radio World: Should broadcast radio be scared of Pandora?
Westergren: I think the two can totally coexist. I think different people want different things from personalized radio and broadcast radio.

The reason personalized radio is growing is that it delivers an interactive, customizable experience that broadcast radio simply can’t. The desire for this experience is what has been driving Pandora’s growth. It is something that people want, and now can get thanks to wireless technology.

On the other hand, broadcast radio has local roots and relevance that people count on. It has the local news, weather and traffic that listeners need. So there is room for both.

In fact, Pandora might be able to team up with broadcast radio stations, to better serve their local audiences. After all, we’re both on smartphones these days.

RW: USA Today says your goal is to see “Pandora in every vehicle.” It also quoted you as saying, “We think that 50 percent of music listening is done in the car … That’s a huge market that we haven’t been able to be part of.”
Westergren: That’s a number that has been slightly misconstrued. What I meant was that half of all radio listening is done in the car, which is why it is a big area of opportunity for us.

RW: So how important is the mobile market to Pandora?
Westergren: Our number of listener hours on mobile devices has surpassed listener hours on traditional computers, and we expect that this trend will continue and is likely to accelerate. But a lot of our listening is done through Web-connected PCs and smartphones.

Cars are a big piece for us. But I expect PC-based listening to still be where many of our listeners tune to us.

RW: Speaking of cars, is your goal to see Web-connected, pre-installed Internet radios being offered by car manufacturers in the future?
Westergren: That would be useful, but it is not essential. Right now smartphones are a logical way for Pandora listeners to tune in while driving, using a variety of technology options to connect to their car audio systems.

The car manufacturers are really supportive of this. Right now you can get Pandora in specially-equipped cars made by Ford, Mercedes-Benz, Hyundai and Buick. Meanwhile Alpine, JVC, Kenwood and Pioneer are offering after-market car radios that can plug into smartphones. You can install these radios in older cars, to connect Pandora to your car stereo.

RW: Who is the typical Pandora listener?
Westergren: They are who you would expect them to be. They are younger, tech-savvy early adopters who have grown up with digital technology. They are very comfortable with it in their lives. They are the sort of audience that broadcast radio used to reach, and now wants to.

RW: How do you make money?
Westergren: Well, we do sell subscriptions, but the fact is that paid subscribers are a very small part of our total base. So advertising is what brings in money, especially visual ads that are shown on Web-connected PCs and smartphone screens.

Audio advertising is a part of our mix, but we can’t do too much of it. We have to respect the context in which we operate. Our listeners do not want to sit through a lot of ads, and they can always surf somewhere else.

RW: Right now Pandora pretty much has the personalized radio market to itself. Do you worry about competitors with big pockets coming in; say, someone like Clear Channel?
Westergren: It wouldn’t surprise me. That’s why we have to push ahead with our growth now. The keys to this growth are our ability to reach our listeners, and making sure it is very easy for them to find and use us. If we can get those two humming along together, we hope to grow pretty substantially. [Shortly after this interview, Clear Channel Radio announced it would acquire the cloud-based music business of Thumbplay in an apparent move to expand its presence in the “personalized radio” space.]

RW: The battle over music royalties almost shut you down a few years ago. Where do you stand now?
Westergren: Our royalty rates are fixed until 2015, so we go back to the table with SoundExchange in 2014.

Royalties are an interesting item. The fees paid by online broadcasters are dramatically higher than those paid by over-the-air broadcasters. It doesn’t make sense to us that the same song played streamed on Pandora or broadcast by KFOG(FM) in San Francisco should be subject to different royalty payments. We don’t see that as fair, so we will be pushing for greater parity on royalties during our next round of negotiations.

RW: Did you ever think Pandora would get this big?
Westergren: In my wildest dreams? Maybe.

We’re certainly enjoying being in this growth phase — we added almost 35 million registered users in our fiscal 2010 — and it is great to see our vision taking shape. But we have endured some very dark periods, so we are not taking anything for granted.