When Lizzie Widhelm joined Pandora Media as its first ad sales person in early 2006, she recalls, advertisers didn’t know what to do with the fledgling online radio company. Widhelm, who today is Pandora’s svp of ad product sales, estimates that one in 100 people she met with in the early days at least had "some vague idea" what she was selling.
A dramatic shift followed the June 2007 launch of Apple’s first-generation iPhone. "The meetings before the iPhone were spent explaining the product," Widhelm tells Billboard. "After the iPhone, clients would spend the hour explaining their experience with the product."
Fast-forward to today (Sept. 9), as Pandora marks the 10-year anniversary of its streaming service. Pandora is celebrating its birthday by turning off all ads on the service. It’s a funny way of ringing in the second decade for a streaming service that has endured -- while various rivals have come and gone -- in no small part thanks to its advertising.
Where other streaming companies -- including Apple Music -- have balanced paid and free components, Pandora's fortunes rely heavily on the free, ad-supported option. How successful has it been? Ad sales made up 81 percent of the company’s revenue in the second quarter of 2015, helping it report a landmark $1 billion in revenue for the 12 months ending June 30. Local ad revenue in the second quarter was $58.9 million, up 67 percent from the same period in 2014. Total mobile revenue was $229.7 million, a 37 percent increase. Indeed, mobile has played a huge role in Pandora’s success: According to comScore, the service ranks No. 2 among all mobile apps for time spent -- second only to Facebook. "Pandora has long ranked as one the leading properties in terms of mobile engagement," says Adam Leila, a comScore senior analyst.
Pandora can also boast strong brand awareness. It was the leader in a recent report by Edison Research and Triton Digital, with 75 percent of the U.S. population 12 and older saying they were aware of Pandora, followed by 62 percent for iTunes Radio (the report was pre-Apple Music), 59 percent for iHeartRadio, and less than 50 percent for all other brands, including Spotify, Google Play All Access and Beats Music (another Apple Music precursor). "They have scale," says Larry Rosin, co-founder and president of Edison Research.
Widhelm looks back on 2006 as a time of "trial and error." She reflects on an era when the ad industry was largely focused on display ads, especially video and large-format rich media. "We lived in a Web world and the more screen space the better," she tells Billboard. Pandora,Widhelm says, took a different view, and by mid-2006 managed to team up with Honda Fit for the first of what are now Pandora’s many "Brand Stations," which are customized stations with display, audio and video messaging for that brand only.
One former Pandora rival corroborates the company’s ad sales progression. David Wade, founder and principal at Marvelous Advisors, a revenue consultancy for technology and media companies, was svp of advertising sales at desktop-era on-demand streaming service imeem when News Corp.’s MySpace Music acquired it and shut it down in December 2009, and he previously worked at another another now-defunct ad-supported music service, SpiralFrog.
"Despite the fact that Pandora and imeem were in direct competition and often the only two properties in the music space being considered for larger advertiser integrations for several years," Wade says, "I watched from the sidelines in admiration as they grew into an enormous business in the years since imeem bit the dust in the 2009 MySpace acquisition."
Wade says imeem contrasted itself with the "set it and forget it" approach of Pandora, where users rarely saw display ads or branded player skins, and instead concentrated on bigger programs with heavy brand engagement. Pandora countered by building audio ad product and recruiting salespeople and managers from terrestrial radio backgrounds. In doing so, he says, "they played to their strengths," growing in revenue scale without chasing their then-competitors’ strategies.
Another experienced player in the online music trenches, Stephen Phillips -- co-founder of We Are Hunted, which was acquired by Twitter in 2013 and became part of Twitter Music -- calls Pandora "one of the brightest stars of music tech in the past decade." Among other things, says Phillips, who more recently created music discovery site Wonder.fm, "Pandora navigated the transition from desktop to mobile probably better than nearly anyone else."
The brigade of music analysts classifying song characteristics for its Music Genome Project got to work several years earlier before the company's first song was delivered. Ads aside, this human-curated database, combined with Pandora users’ almost 60 billion "thumbs up" or "thumbs down" responses, may also have given the company a leg up, suggests Billy Chasen, co-founder of Turntable.fm, a social music service that closed in early 2014.
"The key is curation," says Chasen (who has since launched social app Ketchup), when asked about Pandora in light of its 10th anniversary. "Play me something I’ve never heard before and will fall in love with. The more frequently you can do that, the more successful you will be as a music service."
Wade says Pandora’s success also reflects the notion -- "hard for most of us music fans at imeem to grasp" -- that most people prefer a non-interactive, radio-based experience to on-demand listening. "So Pandora was successful not by offering the superior consumer product, but by offering the one that most people would actually use and get value out of," says Wade.
Pandora’s decision to offer radio, rather than the on-demand streaming model popularized by Spotify and others since the Swedish company’s 2011 U.S. launch, has brought challenges, insofar as the company tries to retain as much of its revenue as it can. While operating under the legal statute for digital radio allows Pandora, SiriusXM, iHeartRadio and the like to play songs by Taylor Swift, who famously removed her music from free on-demand streaming services, the companies are also subject to statutory royalty rates. In December, the U.S. Copyright Royalty Board is expected to set the rates Pandora and others will pay for 2016 to 2020. It could be worse; Pandora currently pays less than 50 percent of its revenue to royalties, compared with 70 percent or greater for services like Spotify and Apple Music. Or it could be better; terrestrial radio stations pay nothing for their own over-the-air "streams."
Those rates have also brought Pandora in and out of court in recent years, as it tries to lobby for favorable changes in law, whether over arcane disputes with performance rights organizations ASCAP and BMI or in a similarly complex battle over royalties to the owners of pre-1972 sound recordings. One legal issue has been Pandora’s 2013 purchase of an FM radio station, a move that the FCC greenlit this past May and that Pandora has said should qualify it for the lower royalty rates enjoyed by most broadcast U.S. radio stations. Unlike Apple Music, which strikes direct deals with rights holders and streams its Beats 1 radio station 100 countries, the statute-reliant Pandora is available only in the United States, Australia and New Zealand.
Andrew Sheehy, an analyst at Generator Research, says Pandora should have both launched an on-demand component and expanded further overseas years ago. "People do pay," he says, "but they’re not going to pay for something like Pandora."
Rich Tullo, director of research at Albert Fried & Company, says he expects Pandora will indeed pursue a subscriber model as it branches out internationally, noting "it seem like the content rights holders are pushing in that direction." Whether consumers are willing to pay for radio remains to be seen.
Regardless, Pandora has kept pushing its advertising initiatives. Local ads, a push for the past few years, now account for 26 percent of the company’s ad revenue, CFO Mike Herring said in a July 23 analyst call.
Jack Krawczyk, vp of advertising product management at Pandora, describes how, since he joined the company almost three years ago, a focus has been on building its advertising technology platform with an eye on personalization. That means going beyond targeting ads based on gender, age and location to, without using personally identifiable information, making guesses about a person’s language (he says only about 40 percent of people that listen to Latin genre music identify as speaking Spanish) or political leanings. Rather than the same few ads over and over again, another goal is for listeners to hear more variety. Krawczyk says the ad product tech engineering team consists of more than 60 people now.
As improbable as it may have once seemed to "music heads" like Wade’s peers at imeem, many people apparently want to listen to branded stations. For instance, Krawczyk points to Kellogg’s branded Pandora radio station, Pop-Tarts, which more than 300,000 active listeners added to their playlists. "Music has this power to create an emotional connection with people," Krawczyk says. "That’s what brands do."
Free, ad-supported streaming is hardly exclusive to Pandora. Indeed, Google Play Music on June 23 launched a free, ad-supported version of its own streaming service, which was previously subscriber-only. Nor has Pandora turned away from paid-for products: On Sept. 8, the company announced that starting a day after the anniversary, this coming Sept. 10, it will begin offering a Pandora One "Day Pass" for 24 hours of ad-free listening, priced at 99 cents. While Spotify has a free, ad-supported tier, newer on-demand services Tidal and Apple Music do not (though Apple Music’s flagship Beats 1 radio station is free).
"Monetizing free audio listening is a fantastically difficult problem to solve," Pandora chairman and CEO Brian McAndrews said in the June 23 analyst call, "and we are alone in solving it." The latter point is a matter of contention, including on Wall Street: Pandora shares closed Sept. 8 at $18.61, up from 17 percent from their $16 initial public offering more than three years earlier but down 30 percent from $26.41 on the same day in 2014. In the second quarter of 2015, its net loss increased to $16.1 million from $11.7 million in the previous quarter.
Krawczyk and Widhelm both cite a mission statement: "What’s good for the listener is good for the advertisers." Krawczyk extends this idea beyond corporate buzz phrase, pointing out that more listening also increases what the company can pay out to artists, too. "We found a way to really drive revenue flow into artists that has never really existed before," he says. That’s a touchy subject, but these days when it’s debated, after a decade of free, ad-supported online radio, everyone knows what Pandora is.
A condensed version of this article appears in the Sept. 19 issue of Billboard.