Last week was a tough one for Pandora. Their biggest investor – hedge fund Corvex Management – went on the record to call for a sale of the company. Corvex owns 9.9% of the pure-play’s stock, and its founder Keith Meister has seen enough.
The company’s stock has fallen precipitously since its IPO back in 2011, and Meister cites the appointment of Tim Westergren as CEO as especially problematic, saying it signals a “business as usual” approach.
And business hasn’t been good for Pandora. In fact, the entire Internet streaming sector continues to struggle to make a profit. A great article in Medium by David Pakman presents a scorecard for streaming music services. And it’s not pretty.
Pakman quotes statistics from PitchBook, a mergers and acquisitions/venture capital database. Here’s how he lays out streaming radio by the 
numbers:
- Since 1977, 175 digital music startups have been funded by investors.
- Around 33 were acquired by bigger companies, often for less money than was originally invested.
- Pakman notes only 7 have delivered meaningful returns.
- Two have reached IPO status.
- Fifteen have had a rough exit or have filed for bankruptcy.
Pakman’s assessment? A 4% success rate for digital music companies, which puts them well behind other tech segments (mobile: 26.5%, software as a service: 28%, eCommerce: 23%).
In essence, digital music companies have failed to achieve a profit, a condition Pakman primarily blames on music royalties. He notes that only the Internet mega-companies (Apple, Google, etc.) can afford to have a digital music division or business.
If you’ve heard Jeff Smulyan pitch NextRadio in the past few years (and who hasn’t?), he often refers to the streaming music business as “a hobby.” And a very expensive one.
While Pandora has the biggest and best-known music streaming channel, it was late to the playlist game, and that explains their purchase of Rdio six months ago. The company is also attempting to generate revenue in other ways, hence their purchase of Ticketfly, an event ticketing company last year.
But are these moves enough to move the needle and fend off a sale? Here’s Pakman’s conclusion about these rumors surrounding the biggest Internet radio brand:
“(Pandora has) more than 82 million monthly active listeners. Even with this extraordinary scale – more than one-quarter of all Americans listen each month – the company is unable to generate a profit. And while many of its investors have made large returns on their invested capital through stock sales at a higher price than their cost basis, the company continues to remain unprofitable, even at the very large scale it currently enjoys.”
Companies like Apple or Amazon can absorb financial losses from streaming radio because their other verticals, like smartphones and eCommerce, are where their billions in profits come from.
In a scaled down way, that’s the model that radio benefits from as well. You’re hard-pressed to find stations that are making significant dollars from streaming their signals (or other audio offerings). Radio’s profits continue to come from spot sales, events, and other digital products. But for AM/FM radio, streaming is a way into devices and locations where terrestrial radio may not be available (at-work locations, for example) or even be easily received.
And as Nielsen works toward digital ratings integration, streaming could end up providing value to terrestrial broadcasters. But for companies like Pandora, focused on streaming radio as their primary product, it’s a very difficult path down the digital highway.
One last note about streaming radio companies is reserved for Spotify, a very popular service that has reached impressive scale, too.
Pakman’s take is that it’s a great service that boasts 30 million subscribers, while still unprofitable. It is notable that Spotify is creating its own content and programming that transcend streaming music and moving into video.
Former MTV/Vh1 exec (and Jacobs Media alum), Tom Calderone, has recently joined Spotify, and is already creating video content that goes well beyond building and trading music playlists. A recent article in Bloomberg details a dozen new original series that integrate video acquired from the BBC and Comedy Central.
One show is Landmark, a music documentary program that highlights an iconic moment in music, such as the Beach Boys’ Pet Sounds LP or the Metallica story. If this sounds like Storytellers or Behind the Music, you’ve got the idea. Another video concept is “Trading Playlists,” where celebrities get together and discuss their musical tastes and playlists.
In much the same way that streaming video service Netflix turned the industry upside down by producing original programming like House of Cards and Orange Is The New Black, Spotify is headed down the same path with these produced video products that create more reasons to subscribe, as well as sponsorship opportunities.
Here’s Calderone’s strategy:
“Music will always be most important, but our audience likes us and wants more from us. We have to figure out a second act, and I think it will come out of video. The idea is to make sure users can come here for something other than playlists.”
We know from our recent Techsurveys that more radio listeners stream video than audio, which is another strong sign that video is the portal into consumers’ media and entertainment worlds.
So Spotify moves to create a “second act,” while Pandora hopes the play isn’t closed down by investors six years after going public.
And a side note to radio programmers and managers: Calderone’s message could easily be interpreted as consulting advice to music radio stations. Remember, his roots are in programming radio.
The play’s the thing, and for the radio business, the streaming sands are shifting all around the industry. Roiling episodes like the one Pandora is now enduring is just the beginning of more tumult and disruption. More streaming channels will fall by the wayside.
Pandora may be having trouble identifying its second act in a pure-play industry that may be going through a shakeout.
For radio, we’re on Act IV, and it’s critical the show goes on.
Jacobs Media has consistently walked the walk in the digital space, providing insights and guidance through its well-read national Techsurveys.
In 2008, jacapps was launched - a mobile apps company that has designed and built more than 1,300 apps for both the Apple and Android platforms. In 2013, the DASH Conference was created - a mashup of radio and automotive, designed to foster better understanding of the "connected car" and its impact.
Along with providing the creative and intellectual direction for the company, Fred consults many of Jacobs Media's commercial and public radio clients, in addition to media brands looking to thrive in the rapidly changing tech environment.
Fred was inducted into the Radio Hall of Fame in 2018.
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Interesting, Fred. As a music lover and radio guy, I find myself split between the idea of enjoying a unique DIY music channel on Pandora and the sneaking suspicion that it has no soul.
Pandora has as much repetition as many commercial stations and no real “stationality.” I guess I understand their challenges on that front as well.
I find the listening experience to be fatiguing at times, and yes, the repetition is part of it. But their biggest issue is economic as David Pakman points out. Thanks for reading the blog, Dave.
I think Pakman is dead on – with the current royalty structure there’s no real business model. When a service reaches 1/4 of America, converts its audience into revenue really well (a Pandora ear generates more revenue than a radio ear) and can’t make a profit – that says it all. And the fact that artists are crying that Pandora/Spotify don’t pay them enough only underscores the problem.
People love streaming – video and audio and for the most part, there is no way to make a buck doing it, no matter how much audience you can attract. I’ve said before (apparently with not one person in agreement) that radio should consider trading a performance royalty for a streaming royalty rate that would allow for a profitable business model. IN the meantime, everyone is losing money at what the public wants.
It will be interesting to see how this plays out.
I knew when I wrote this post that you’d likely weigh in, Bob. You’ve commented about the (lack of) efficacy of streaming radio, backed up by Pakman’s article. Thanks for chiming in.