Pandora Media CFO Mike Herring will be the first person to tell you that music is a very personal experience. Embracing this philosophy is what has made Pandora successful. But Pandora’s customers are hardly listening alone: the company is the de facto leader in Internet radio, with more than 70-million active listeners — seven percent of radio market share in the U.S.
Enter Apple, which is nipping at the heels of Pandora with its September launch iTunes Radio. Apple already has 20-million active listeners, according to September numbers, so Pandora will have to diversify its offerings to stay at the forefront of consumers’ and advertisers’ minds. But the financial markets clearly still recognize Pandora as the sector stalwart. Its stock has rallied since the iTunes Radio launch, hovering in the $24 to $28 a share range as of Friday.
How will Pandora continue to increase revenues and its listener base, turn its first profit, and innovate, all as competition from iHeartRadio, Spotify and Apple heats up? Currently, the company’s focus is on increasing its share of the overall advertising dollars in radio. It’s also setting its sights beyond desktop and mobile devices.
Herring talked with CFO about the company’s long-term goals , taking on terrestrial radio through connected radio and plans to expand the company’s global footprint. The transcript has been edited for clarity.
Pandora remains one of the most popular music-streaming services, but Apple’s launch of iTunes Radio in September could pose a threat. How does Apple’s entrance into streaming radio affect the company in the long run?
In this space, we’ve had large, well-funded startups and big incumbents attempt to compete, and we’ve done pretty well. That said, Apple is a very impressive company. They’ve been a great partner to us over the years; we’re the highest grossing, non-gaming iOS app. We believe [Apple] is worthy competition, but we’ve also proven our ability to execute well. It’s really not an easy business to be in. You need scale to operate the business because the costs are high. Music is a very personal thing, and it’s fantastically hard to deliver consistently excellent personal music-listening experiences. We have done that better than anyone else. And that’s what’s driven our success to date. As long as we continue to do what we do well, we’ll fare well.
Moving forward, how will Pandora keep listeners from moving to competitors’ platforms?
One thing that’s been key to our success is focusing very specifically on the radio music-listening experience. We haven’t chased down a lot of other opportunities. But as our platform gets bigger, we have the opportunity to provide different types of audio content for that community. There are areas of adjacency, but the priority today and tomorrow is going to be Internet radio.
We have a lot of low hanging fruit. We’re at seven percent of the listening audience in the United States, and we have one to two percent of the overall advertising dollars flowing to radio. That there’s a big gap between what we can potentially drive in advertising dollars to where we are today, based upon our listening share. There’s also huge potential for us to grow listenership both in users and in hours. Seventy million is a lot of listeners, but there are 240 million people who listen to AM/FM radio. A large number of those listeners will move over to connected radio in the next few years, and Pandora will benefit from that migration.
Outside of competing with terrestrial radio, is there a plan to gain more subscription-based users? Where will revenue continue to come from?
Twenty percent of our revenue comes from subscriptions, but the bigger opportunity long term is the advertising side. The data show that in the United States the vast majority of people won’t pay for music. They’ve been conditioned over their lifetime that music is free. Generally, it’s “paid for” through the listening of advertising associated with it. That’s what AM/FM radio taught us. The big opportunity long term is providing a free music-listening experience, a high-quality one, and supporting that free listening through advertising and other types of monetization.
Pandora is in the U.S., Australia and New Zealand but has not expanded beyond that. Any plans to broaden your international reach?
Internationally, it’s tougher. The big issue in the music world is licensing structures. They’re complex, they’re uneven and they’re expensive. It’s our largest cost line. Fifty-one percent of our revenue last quarter was paid out in licensing fees for content, and that sounds like a big number. It’s not. It’s worse internationally. If we can figure out the right financial structure internationally, we will definitely move in that direction. To date that structure just hasn’t been available.
The company has yet to be profitable since it filed its initial public offering in 2011. How do you see Pandora being viable in the future?
The mobile device has been and will continue to be a really important platform for us to stream music to listeners. But things like the connected car and smart TVs will continue to add opportunities for us to drive listenership, and we will monetize that listenership through advertising. We’ve made big investments in back-office systems and in integration into the buying platforms that the radio [advertising] industry uses.
The other area of growth is in new users. We are primarily listened to through mobile devices and desktop devices. But 47 percent of [radio] listening in the United States is done in the car. The transformation of the car to a connected platform is still in its early days. This year, one-third of all automobile models sold in the United States will come with Pandora in the dash. GM announced that in 2015 they will roll out a connected car across all their models.
What obstacles exist for the company?
Businesses like Pandora operating in the mobile world and in the era of massive scale across connected, logged-in users have a huge opportunity. We need extremely flexible systems. We need to have teams that work very closely together to develop pathways and strategies in order to optimize businesses today and be flexible enough to pivot tomorrow.
One of the big things we fight is making too many decisions that lock us into a pathway that we can’t get out of. We don’t know what the business opportunity might be in six months or a year, and we’ll want to pivot and take advantage of that. We make all our decisions with an eye to, ‘how well does that system integrate with others? What is the road map of those systems going forward?’ We need to be able to connect all those dots from how we’re organized internally to the systems that we operate on to how they work with the product that’s being developed. The organizational structure needs to all work together if we’re going to be successful. To stay nimble and [be] profitable in that kind of environment, you need to be very flexible.