Yet, speaking at the Music Biz conference in Nashville on May 16, Pandora CEO Roger Lynch seemed unfazed. The chief exec interpreted Spotify’s focus on free as a boon for all streaming services across the ecosystem, including his own. “It’s an acknowledgement that there is an opportunity to develop a significant business with consumers who will not pay for subscriptions,” he said to a packed audience at the Omni Hotel. “There’s still a tremendous amount of growth to happen within free."
Interestingly, both Spotify and Pandora see their free offerings as direct competitors to terrestrial radio. Spotify’s global head of creator services Troy Carter recently called the company’s ad-supported tier “the biggest radio station in the world.” Lynch shared a more realistic take on Pandora’s positioning: “Despite the fact that we’re the largest streaming service in the U.S., we’re only 10 percent of the listening that happens on terrestrial radio,” he admitted. “But that’s a ratio that I think will flip over the next decade.” It's no coincidence that the New York Stock Exchange categorizes Spotify and Pandora as members of the "Broadcasting - Radio" industry.
Not only does each of these services have a much larger free audience than any given radio outfit, but artists and labels also get a cut of ad revenue from streaming, in contrast to being left in the dark financially by traditional radio spins (at least in the U.S.). Both Spotify and Pandora cite this latter benefit in investor presentations in an effort to convince industry bigwigs that investing more in free-streaming audiences -- and migrating them away from terrestrial incumbents -- may be more profitable, not less, in the long run.
"There are millions of music fans who can’t afford $9.99 a month, but that doesn’t mean they aren't music fans," Carter said at a press conference in New York last month. “Artists can’t afford to ignore that audience."
Spotify can't afford to ignore them, either: the company's ad-supported revenue is growing more quickly than its Premium revenue, at 38 percent versus 25 percent growth YOY in Q1 2018, respectively. This gap makes sense in the context of Spotify's continued global expansion, particularly into territories across Asia, Africa and Latin America where ad-supported experiences remain the dominant norm for digital music consumption.
In comparison, Pandora’s ad-supported revenue grew by around 4 percent YOY, from $223.3 million in Q1 2017 to $214.6 million in Q1 2018, perhaps signaling the saturation of the ad-supported music streaming market in the U.S. After winding down operations in Australia and New Zealand in June 2017, Pandora remains a U.S.-only service -- arguably one of its biggest obstacles to continued growth against the competition.
The one area where Pandora might be outpacing Spotify: advertising and marketing tech. At Music Biz, Lynch discussed how one of his higher-level priorities for Pandora was embracing a more data-driven marketing strategy and investing more heavily in teams with ad-tech expertise -- working closely on the cause with new CMO Aimée Lapic, whom the company hired in Dec. 2017.
"I'm telling [Aimee], ‘You have an unlimited marketing budget. As long as you prove the ROI on your marketing, we'll spend more and more money on it,'" said Lynch.
One of the tightest races between Spotify and Pandora in ad-tech centers around programmatic advertising, or the algorithmic purchase and sale of ad space in real time.
Spotify was the first music streaming service to offer programmatic ad sale capabilities back in 2016 through partners like AppNexus and Rubicon Project, and the company acqui-hired content recommendation startup MightyTV in March 2017 to oversee its programmatic efforts. Spotify's programmatic ad revenue nearly doubled YOY last quarter, and almost half of all impressions sold on the service in 2017 were bought programmatically, accounting for 18 percent of its total ad revenue that year.
Yet, just this week (May 29), Pandora completed its $145 million acquisition of programmatic ad powerhouse AdsWizz -- which counts competitors Spotify, SoundCloud, Deezer and TuneIn among its clients -- and inherited 150 employees in the process, all focused on ad-tech engineering. While AdsWizz will continue to operate as an independent subsidiary of Pandora under the former's original leadership, the deal “helps [Pandora] transition from the largest ad-supported digital audio publisher to the largest ad-supported digital audio platform,” said Lynch.
With nearly two-thirds of all digital ad supply in the world now included in its own inventory, Pandora now sees itself as a competitor to Google and Facebook for advertising dollars. “We have to give smarter tools and return-on-investment reporting to our advertisers, just like those competitors do,” said Lynch.
One lever Pandora is trying to pull on this front is a more flexible, personalized ad experience that results in a more tangible value exchange between listener and advertiser. The underlying idea is that, as with music recommendation itself, ad sensitivity is both highly individualized and dynamic, yet its evolutionary nature over time is terribly underserved by current incumbent ad formats.
In February 2017, Pandora announced an exclusive partnership with UK-based startup A Million Ads to allow advertisers to serve personalized audio creative to each individual listener in real time, based on factors such as age, gender and location of residence. “We can take everything we know about the user and come up with a million possible versions of an ad, from just around 10 seconds of a script with seven or so variants,” Jonathan Eccles, director product management, listener ad experience at Pandora, said during a workshop at Music Biz. “We can also personalize each individual user’s ad load on the basis of frequency and length. What’s the right mixture for ad breaks? A 30-second ad and then a 10-second one? Or a couple of 10-second ads in a row?”
Pandora is currently testing this dynamic ad-tech with only a handful of partners, including Audible and The Ad Council, but plans to scale the offering to more partners later this year. "We see a future where the audio ad works as hard as the video ad,” Lizzie Widhelm, svp ad innovation & sales enablement at Pandora, told AdAge. “And we know how large that video market is."
While Spotify is not as influential of a public figure as Pandora in the audio ad-tech arena, it still has several competitive advantages over Pandora in terms of overall advertising appeal. Firstly, Spotify is quickly expanding into a multimedia hub beyond audio streaming -- investing in new original series like education-focused The Game Plan -- and video is now the service's fastest-growing source of ad revenue. Secondly, Spotify might be more attractive to advertisers with its user demographics: while Pandora users skew relatively older in the streaming landscape, millennials name Spotify as their No. 1 platform for discovery and variety of music recommendations, according to youth marketing research firm Ypulse.
Another hot debate emerging in the music industry is to what extent artists and labels can still control their own messaging and advertising on streaming platforms, as opposed to relinquishing all distribution and promotion control to the services themselves -- through automated recommendation systems that Spotify execs frequently refer to as "self-driving music."
In this vein, Spotify is beta-testing its own self-service ad studio, which allows artists and brands to upload a script for up to 30 seconds of an audio ad, select a background track and voice profile and let Spotify take care of the voiceover recording work. The feature currently has a waitlist and is only available in the U.S., U.K. and Canada.
One could argue that Pandora actually has a first-mover advantage in the DIY ad space, with its suite of Artist Marketing Platform (AMP) tools, which first launched in 2014 and allows artists to advertise directly to their fans using their own voices and creative assets.
Perhaps the best-known feature in AMP suite is the AMPCast audio messaging tool, which enables artists to record short audio messages on the fly -- often in the studio or on tour -- then distribute them almost instantly to the Pandora platform to reach avid listeners. While Pandora’s audience is North America-only, international artists from any country can still take advantage of this and other AMP tools, which can be a significant boon for international marketing efforts.
“It’s not just about getting more spins or about broadcasting to everyone like a billboard, but also about finding the right fans and communicating directly with them,” Adam Zabarsky, senior product manager, music industry at Pandora, explained at Music Biz.
Yet, even if Pandora might be the largest streaming service in the U.S. by monthly active listeners and is one of the earliest and most prolific influencers in the audio ad-tech space, those accolades might not matter for financial sustainability in the long run -- especially if Spotify, which has much greater scale, comes up with copycat product offerings on its own free tier.
“Once services like Spotify venture further into the DIY ad space, I’m concerned that it’ll be game over for Pandora,” Minal Hasan, founder & managing partner at VC firm K2 Global and early investor in Spotify, tells Billboard. “You see that same trend across consumer tech: for instance, Fitbit had a great health-tracking technology, but then Apple Watch came out with the exact same thing and pretty much killed Fitbit’s market share.”
When interrogated about their company's prospects against Spotify, Pandora execs insist that they are not competing with other streaming services as directly as people may think. "If you look at companies like Spotify and Apple, what I love is that we’re actually not trying to beat each other at each other’s games,” Beville Dunkerley, Nashville director of artist marketing & industry relations at Pandora, claimed at Music Biz. “We’re trying to beat ourselves at our own game."
But from an investment and consumer-tech perspective, such a statement is arguably invalid. Given that Pandora and Spotify are rolling out many of the same features on their ad-supported tiers, one cannot underestimate the importance of scale as a determining factor for success in an increasingly homogenized product environment.
"We’ve seen the same pattern over and over again: on the consumer side, ubiquity is key," says Hasan. "Whoever has that ubiquity can develop however many apps they want on their platform to outpace the competition. What’s critical for Pandora is not the quality of their offering, but the quality of their overall brand and platform. If Spotify and Apple Music have a better, larger brand and platform, they can come out with the exact same product and do significantly better."