Pandora Eyes the “Holy Grail” of Radio

In an interview with the L.A. Times Music Blog “Pop & Hiss,” Pandora founder and CEO Tim Westergren talks about future plans for the trailblazing media company.

“Simply put, half of radio listening happens in the car,” Westergren says. “People spend 20 hours a week listening to music; 17 hours of that is from radio. About half of that radio listening, or 8.5 hours, occurs while they’re in a car. So that’s the holy grail.”

Westergren founded Pandora Media in 2000, born out of the Music Genome Project, an experiment that analyzed the attributes of all genres of music. In 2005, he launched Pandora’s Internet Radio, introducing listeners to different bands and songs deemed similar to their designated tastes. After overcoming a near collapse due to the retroactive increase in performance royalties in 2008—alleviated by the subsequent reduction in fees after the successful SaveNetRadio campaign—Pandora conquered the mobile world, garnering over 40 million listeners on mobile devices alone.

In addition to enabling Pandora for over 200 unique devices, including Blu-ray players and flat-screen TVs, Westergren told the L.A. Times that the company is “actively developing” products with car manufacturers. He mentioned Ford and Mercedes and after-market stereo companies such as Pioneer, stating that the goal is to “be in every new car that rolls off the  manufacturing line.”

What does this mean for terrestrial radio? Well, Westergren touts a better listener experience, pointing out that Pandora has 45 seconds of advertising—three 15-second commercials—every hour, while broadcast radio typically has 12-14 minutes of ads per hour. While Pandora is currently a free streaming service, users can opt into a subscription service at $3 per month, allowing them to bypass ads and benefit from a higher-quality stream. At this time, Westergren admits that “only a tiny number of people subscribe,” and that the majority of the 48 million Pandora users are exposed to advertising.

Westergren stresses the easily customizable aspect of his product, opening the door for local businesses to advertise. “When ad buyers think of the Internet, they think it has to be national. But that’s not necessarily true. Every ad we do can be narrowed by age, gender, ZIP Code and musical taste.”

While Pandora could be viewed as a threat to terrestrial and satellite radio advertising revenue, Westergren believes that Internet radio is actually helping artists and labels. “For years, broadcast radio collected billions of dollars every year in advertising. Almost none of it goes to the labels, and a small amount of it goes to composers. It was the biggest part of the music business, and all the money was quarantined from the rest of the industry. Every hour that goes from broadcast radio to Internet radio means more money for artists. That’s because Internet radio, unlike broadcast, pays performance royalties [to recording artists as well as songwriters. Over the air radio is not required to pay royalties to bands that recorded the music.] Last year, we made $50 million in revenue, and $30 million of that went to [recording] artists.”

Westergren says that users of Internet radio tend to purchase more music—43% of Pandora users purchase more music than they did before they signed up, while only 1% purchase less music. “We’re promotional, not substitutional.”

So, what does this mean for broadcast radio? Video didn’t succeed in killing the radio star, but it remains to be seen what Internet radio can do, once it’s available in our cars.