A year ago, Pandora founder Tim Westergren was predicting the company’s collapse in the wake of new, higher streaming rates for Internet radio services. Today, he’s predicting the personalized Internet radio service will be profitable by next year.
There have been a number of developments leading to this turnaround, not the least of which is the hugely popular iPhone app. Other moves include a new premium tier, more aggressive advertising initiatives, and most recently the company’s first on-demand album premier for the Dave Matthews Band release “Big Whiskey and the GrooGrux Kings” a full week before the street date, sponsored by Brita.
Westergren took the bold step of speaking with Billboard about these developments, while riding his bike in San Francisco.
So you’ve got the sponsored album streams, the premium tier and more ads… What spurred all these changes?
It’s a critical mass thing. We’ve been wondering for a while when the going would get a little easier. And I say “easier” in quotes. The effectiveness and ease of your business model is really connected to your scale in an advertising world. As Pandora has gotten larger, our ecosystem has started to fire on all cylinders. I wouldn’t use the word sudden, but in the last six months I’ve seen a real difference in how advertisers think about us. We’re doing 60,000 new registrations a day now. That’s twice what we were doing a year ago.
Without giving them more hype than they’ve already received, how much of an impact did the mobile applications have in this respect?
It’s a real driver. Between the iPhone and BlackBerry, we get half our new users from mobile. It’s really changed the perception of what Internet radio is. For a long time we were stuck in this bucket of computer radio both in the minds of listeners and advertisers. Now, everyone is beginning to realize that this is really radio. You can take you iPod and plug it into your car or stereo system at home. So there’s been this wholesale recognition that this is the future of radio. The places that were once the sole domain of broadcast-the car-are now the highest growth areas for Internet radio. But the pending resolution of the royalty thing has been a big change too.
Would it be fair to say that the prospect of increased rates acted as an incentive for you to find new ways to monetize the service?
That’s not affected our own motivation level. Out of a 130 people, 45 of them do nothing but sell ads. We’ve been dead serious about monetization for a long time. Finally being able to talk in positive terms about the royalty rate frankly has made advertisers less skeptical. If you have a car scheduled for a 2010 launch, you’re not going to advertise with a company whose founder was just quoted saying they’re going out of business. It sucked for our advertising team, and they’ve been dealing with this for three years. Ever since the CRB ruling came down, I’ve treated every interview as an opportunity to say how fucked we were.
But I’ve noticed you’ve dialed down that rhetoric quite a bit. How much of that is because you’re that hopeful for a resolution and how much of it is due to the success of these new initiatives?
Don’t get me wrong. It’s not that we’ve suddenly become comfortable with the CRB ruling. [laughs] It reflects a true optimism about a resolution. I really can’t give you details, but we’re negotiating a comprehensive solution. Nobody here wants to do this again. Nobody.
So what’s the timeline now? Weeks? Months?
I would be deeply disappointed if we were months away. But I’ve said “soon” many, many times before. You should view my answer with due skepticism. Lord knows I’ve earned it.
A recent Bloomberg article says the company may reach profitability as early as next year. How?
Everything comes with the caveat of a reasonable resolution of the royalty rate. But if that comes about, the combination of a mature ad-supported product and scale gives us reason to be confident, or at least set a reasonable goal of profitability.
What’s the impact of this live stream of the Dave Matthews Band album? What does it signify in terms of any change in Pandora’s strategy?
It’s very substantial for us. It’s the first time we’ve done anything like this. We’ve never had music by an artist pre-release on our site for on-demand streaming, and certainly never with an artist of this magnitude. His management company did a survey of fans to see where they find their music online, because they’re really trying to position him well. Pandora was the site they referenced most, so they came to us.
You weren’t out shopping for bands to do something like this?
No, we haven’t been chasing this to be honest. It’s something we’ve always wanted to do. But the significance of this is that we’ve reached a size and achieved some degree of brand recognition as a valuable place for artists. It’s a great opportunity for us. When you couple it with a brand, it’s a great revenue generator.
How does this work, is the album just part of the Pandora stream now. How are fans seeing this?
We only present the album to listeners on Pandora who have indicated an interest in his kind of music. When you present people with music they actually like, it doesn’t feel like advertising. The music is in the Genome as well. So you can get them both.
Brita is sponsoring this. How important is exclusive material when trying to lure sponsors?
An exclusive always have a cache, so logically it’s going to attract a larger audience and attention. So it’s an environment that’s very attractive to advertisers.
How did you bring the band and Brita together?
Once this conversation started between our folks and [Dave Matthews Band’s management group] Red Light Management, we went out to find a sponsor for it, which I suspect will be the model for the future. We hope Dave Matthew’s Band’s involvement will make people aware of this opportunity, and already we’re getting calls from bands that are interested in doing the same thing.
How often do you expect to debut new music like this. Once a month?
More often than that I hope. Because it’s targeted. As a listener, you’re not going to feel like it’s that many because only the ones relevant to you are the ones you’re going to see. But we have the capacity to do a lot of them. If you’re somebody who likes Common, you won’t see the Dave Matthews one, unless you’ve already indicated an affinity for his music. Our religion at Pandora is that we don’t spam you. If U2 comes out with a new record, we won’t send an announcement to all Pandora users, because it’s irrelevant for many of them.
Are you focusing this program on any specific genres or artist tiers, such as superstar artists only?
No. I’m glad you asked that. My vision for this is that it will be useful for artists at all levels. In general, the big sponsors will go for big programs. That’s just the nature of the beast. But I also want it to work for an independent artist with a new record coming out and find some way to get involved in a promotional mechanism. For the indie artists, it’s going to take a different form because we’re not going to be able to attract a sponsor most likely. But we’re going to find a way for smaller artists to promote new records.
This move will put you in even greater competition with the likes of MySpace Music or Rhapsody or iLike, all of which are competing for album premiers and exclusives as well. How do you intend stand apart from those others?
I think the principle differentiator will be the way we’re targeting it to only relevant listeners. We have an audience that’s very tuned in for discovery. We sell a million songs a month through iTunes. I think we’re establishing a track record as a place where people discover music, and when they do they buy. We’re not just a browsing site. I think that’s beginning to pay dividends.
You recently introduced a premium tier, Pandora One, for $36/year. How does this differ from your existing premium/subscription tier, and should we expect to see you making more noise for this one?
It was our best kept secret. I could count on three hands the number of subscribers we had. [laughs]. We were and still remain convinced that our business is about free ad-supported music. Even if the subscription service does as well as we hope it will, it’s not the cornerstone of business. The decision to invest engineering resources into Pandora One is a reflection of a couple of things. One is that we’ve reached the size audience we have, the percent of people that we think is interested in paying is a decent number. [Wind breaks up his next sentence]. Sorry, just went through a tunnel. What I was saying is that the number of people in any given audience that’s willing to pay for something is usually a pretty small percentage. Now, we’re big enough where even that small percentage is meaningful. These are people who are either listening to a ton of music, or asking for a higher bit-rate, just those who want more features and are willing to pay for it. That audience is there now.
What percent are we talking about?
I don’t know. Historically, if you look at other comparables, it’s between 3-4%. So I hope we beat that.
But if you port your highest-tier users to a paid service, won’t that affect your advertising by removing the most dedicated users?
It’s a fair question. Yes, some number of our users will not be viewing ads anymore. But the interaction rate-the level of engagement people have with the service-is pretty consistent that I wouldn’t equate to power users. So you might be someone who listens to Pandora 8-10 hours a day doesn’t mean you’re also someone who clicks on it every hour. There’s not a real correlation there.
This comes in conjunction with an announcement that you’re increasing the number of ads per hour. When you first started experimenting with audio ads, there was an avalanche of criticism. What have you learned since then and how have you tweaked the model to avoid that?
Yeah we learned a lot. Shorter-10-15 seconds-is a more appropriate ad format for the Web. Even broadcast radio is moving in that direction. With a movement towards shorter form, there are more assets out. Advertisers are developing more spots, so you have an inventory, and the agencies are getting comfortable with that. Also, it’s going to take a while to get the volume of audio ads that we think will bother somebody. Right now, you don’t get more than one 15-second ad an hour. It’s going to take a couple of years to get more than that.
