Pandora’s Predicament: Music Discovery and the Future of Internet Radio

Portrayed by a slick and forcible Justin Timberlake in The Social Network, Sean Parker first gained notoriety for his work with Napster. The file sharing program no longer exists at the tech-forefront, but the site disrupted the industry with lasting impact. In fact, piracy remains the dominant mode of consumption. Realizing music’s need for a legal and innovative business model, the enterprising Parker declared last year, “I’ve dedicated the rest of my career to fix what I broke.”

Enter Spotify.  Parker is banking on the popular European streaming service that has just pierced the American market.  Compatible with Facebook’s interface, and with a colossal click and play library, the British based company is poised to blaze through the States.  Industry observers believe Spotify’s expansion will crowd out the music streaming leader, Pandora.  However, the internet radio company should not be counted out.

Pandora’s appeal has always been its focus on music discovery. Personalized radio exposes listeners to new music better than anyone else. It gives Pandora its competitive edge.

The founder of Pandora, Tim Westergren, began with the idea that music could be categorized and organized using a mathematical algorithm.  The Music Genome Project, the heart of Pandora, is an extensive library that genotypes songs, assigning tracks over 400 traits.

Musicians at Pandora listen to every new song and catalogue its features.  The result, as stated in their Form S-1 to the S.E.C, is a “proprietary personalized playlist generating system.”  Pandora makes customizable radio stations based on users’ tastes.

Listeners begin by creating a station based off a song or artists, the station’s “seed.”  From there, songs are played that demonstrate similarities to the seed song or artist.  Users can give a streaming song a thumbs up or thumbs down, offering their radio station insight to their preferences.  Since the company’s inception in 2000, Pandora has collected over eight billion thumbs.

The beauty of the Pandora experience is the exposure to music that is both familiar and fresh.  A mixture of acoustic and electric in Bon Jovi’s “Livin on a Prayer” leads the listener to AC/DC’s “You Shook Me All Night Long” which may lead to a lesser known Def Leppard track and eventually to a brand new artist shaped by British heavy metal.  The exhilaration of discovery, of finding another favorite band, ties the user to Pandora.

Critics of the company argue that music discovery is unnecessary if users have access to an immense collection of songs.  Pandora’s library totals 800,000, dwarfed by Spotify’s 15 million. Westergren addresses this issue by differentiating Pandora’s service.

In an interview with TechCrunch, he said a listener “would find some songs they like on Pandora, and then go buy them on iTunes or listen to them on demand via Rdio or Spotify and use them in tandem.”  Where Spotify is a limitless iTunes library, Pandora informs how preferences and playlists are made.

Another criticism leveled at Pandora is the company’s ad-based business model.  Listener growth is exploding, reaching 80 million users this summer, however the costs of licensing music mounts higher.  Rather than focus on a subscription based model, like Spotify, Pandora offers its users free, limitless streaming with visual and audio ads.  This strategy maximizes user growth while it forgoes revenue from subscribers.

The challenge Pandora faces is converting its popularity into revenue from advertisers.  Although 70% of audio streaming takes place on mobile devices, less than 1% of total ad dollars are spent there.  As a warning to potential investors, the company emphasized it has yet to make a profit.

According to Businessweek, Pandora plans to overcome these obstacles by expanding its ad sales force and by growing its user base through automobile integration.  By 2015 advertising dollars spent on mobile devices is expected to multiply by 12.  In addition, Pandora radio will be found in the 2012 car models of General Motors, Ford, and Toyota, including the Camry. Businessweek reports that by rapidly increasing its user base now, Pandora will be positioned to receive mobile ad dollars in the near future.   Once ad agencies decide to aggressively court mobile audiences, Pandora can offer millions of eyes and ears.

Facing a new competitor in Spotify and lackluster revenue from smart phone ads, many have dismissed Pandora’s potential.  However, with a loyal, growing fan base Pandora hopes to leverage its free and limitless listening to cash in on the future of mobile streaming.  Pandora offers a service that is not simply the music people enjoy, but the unearthing of something new.

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