Digital Radio Follows Pandora's Lead
Illustration by Am I Collective

Web radio's No. 1 player might have been under fire from parts of the music biz, but the number of rivals joining its space shows the format's promise.

Digital music companies have plenty of reason to dive into Internet radio. Mobile advertising, vital to mobile-first radio services, improved greatly in 2013. In their latest quarters, mobile ad revenue accounted for 49% and 58% of Facebook’s and Pandora’s earnings, respectively. And although on-demand services like YouTube or Spotify are changing the nature of the recorded-music business, people haven’t lost interest in listening to radio. A recent Edison Research survey says 53% of online Americans ages 12 and older are Internet radio users.

Pandora had its share of headline-grabbing moments in 2013, which led to clashes with the music business. The company took the unprecedented step of purchasing a broadcast radio station in South Dakota to bring more certainty in the royalties it pays to music publishers through performing rights organizations. It sued ASCAP for lower rates. And after championing the Internet Radio Fairness Act in 2012, Pandora opted not to pursue royalty relief through Congress.

It’s the less-noted events that keep Pandora ahead of the game. The company’s audience data is now integrated with two popular media-buying platforms. It improved the user experience on iPad and Android tablet apps. It added two new platforms, Google’s Chromecast and Microsoft’s Xbox. Automotive partnerships struck years ago have quietly produced results. By midyear, 13% of Pandora’s listener hours came from an “other” category that includes automobiles.

Perhaps most important are the constant improvements that go unseen but enhance the service’s ability to guess which song is best for a listener at a particular moment. “It’s something that needs constant innovation,” Pandora CFO Mike Herring says.

Imitation isn’t just a form of flattery: It’s a sign that a marketplace is working. In September, Apple launched its eagerly awaited radio service, iTunes Radio. It attracted 20 million listeners in slightly more than a month, according to figures released by Apple. A survey by investment bank Canaccord Genuity found that about 2% of iOS device owners and 8% of iTunes Radio users were using the service exclusively about a month after its release.

Subscription services are following Pandora, too. They’re either improving their radio features or creating editorial and other features to do the heavy lifting of music discovery for their on-demand listeners. The subscription services of yesteryear were time-consuming, hands-on products that required a serious commitment in time and energy to use properly. Today’s subscription service is far less demanding.

2013: The Year in Music

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Rhapsody was one of the on-demand services that improved its radio offerings in 2013. The value of the on-demand service is simply to allow people to choose what they want to hear at any given time.

But Rhapsody users still want radio. In a survey the company conducted among existing users, 76% said radio was either important or very important to the Rhapsody experience, senior VP Paul Springer says. However, just 30% were using the old radio features. That let Rhapsody know there was untapped potential.

One Internet radio service not borrowing from Pandora’s playbook is Songza. The small service offers contextual playlists—songs for waking up, working at the office or having a party -- rather than copy Pandora’s method of personalized radio. But like Pandora, Songza found advertising and Internet radio can work together. Such brands as Samsung and Taco Bell use Songza’s “native” advertising built into the user experience rather than “shouting between songs,” CEO Elias Roman says.

Near the end of the year, an important threshold was quietly reached. For the first time since making its financials public, Pandora’s royalties had taken less than 50% of revenue. That shows a profitable, sustainable Internet radio business is attainable given a combination of business model, product and perseverance. It could have been the breakthrough of the year.