As growth for Pandora slows and it faces the prospect of introducing an on-demand business model, the internet radio pioneer is quickening efforts to squeeze all the advertising revenue it can from its listeners all the while mindful that it needs to diversify its commercial model.
From offering 100 per cent in-view impressions across in-app and desktop to unearthing better measurement, the company has been at pains post-Cannes to show advertisers it is ready for what it calls the “renaissance of audio”. Unlike radio, the cost of that resurgence cannot be covered by advertising alone – as seen by news of its upcoming on-demand service – though it can help cover investor apprehension about a service that’s yet to turn a profit since its IPO five years ago and under growing pressure from deep-pocketed tech giants.
While well entrenched in North America’s $17bn valued radio space – accounting for 10 per cent of total radio listening – Pandora’s active monthly listener count fell 1.3 million to 78.1 million in the three months to June. In a market that’s proven consistently ineffective at persuading people to hand over their money, that slowdown in listeners highlights the importance not just of the service’s total advertising revenue but particularly its advertising revenue per listener hour.
Ad revenue rose 15 per cent year-on-year in the quarter to $265.1m, while listener hours jumped 7 per cent to 5.66bn. It’s hard to overstate the importance of this upside given Pandora, unlike YouTube or Spotify, pays a flat per-song fee, meaning that when it does make money from the content it hosts it gets to keep all the additional income for itself.
“If we can grow the time listening then there’s more opportunity to reach the right people at the right time, giving advertisers the ROI they need,“ said Lizzie Widhelm, Pandora’s senior vice president of ad product sales and strategy. “I feel very strongly that the agencies really need to think about the creative permeations of using audio media as well as how they leverage data for targeting. Video has been winning for a very long time and I think audio can be just as important.”
Back-to-back quarters of advertising revenue outpacing listener hours is testament to this prediction, with the online radio player expecting the value of its inventory to swell as streaming becomes ubiquitous across more devices like the connected car. And there lies the rub; the business is trying to optimise for as many listener hours as possible across the 1,700 devices it is already available and yet not up the number of ad hours. There’s much more focus on adapting to how the context of how people listen to radio is changing.
Part of that shift will see Pandora’s probable entry into the on-demand music realm, putting it in direct competition with the likes of Spotify and Apple Music. With this shift comes the need to strike new deals with record labels as until now its radio status has meant it only needed to pay the royalty rates set by the Copyright Royalty Board. That means higher costs and consequently heaps pressure on its advertising strategies to lift margins.
“The most effective way to reach someone in their home is through ad audio ad,” claimed Widhelm. “But the same audio ad doesn’t work in the home as it would do on a mobile device so there’s a lot of creativity still in front of us. The renaissance of the audio hasn’t quite yet hit but it will because you’ve got so much change happening in the home and the car when it comes to connected devices.”
Part of the creativity Widhelm refers to will come from Pandora’s ‘intelligent ad insertion’ whereby the same data scientists it uses to serve up personalised recommendations are also providing a similar service for serving ads based on a listener’s behaviour. It takes into account predictive science to understand when an ad will receive the most attention, whether it’s in an audio, sponsored listening or custom station format and when.
For example, younger listeners are more inclined to skip between stations during the first five minutes of a Pandora session and may be turned off by a deluge of ads. Using ‘intelligent ad insertion’, the radio player is able to limit ads until the first five minutes are up and the listener has settled on a station.
Having that human touch doesn’t mean Pandora has set the bar low for programmatic. Rather, it is waiting for the market to catch-up, particularly when it comes to in-app placements. Only display buys are bought this way on Pandora, though it expects the “slow” adoption of automated buys in-app from agencies and brands to pick up in the near future. “More than 80 per cent of our listening is on mobile devices and so that was a big challenge for us because the market wasn’t ready for in-app programmatic," said Heidi Browning, senior vice president of strategic solutions at Pandora. "It took us a number of years for us to get to this point where we can transact in a meaningful way. It’s still slow with the adoption for the agency and the client side in the app."
Audio is undoubtedly Pandora’s main advertising stream and yet that it also wants to capitalise on advertiser appetite for video inventory. Attention – whether that be listening or viewing – is at the heart of Pandora’s pitch to advertisers, which is why it’s experimenting with muted autoplay videos on the side of the app to complement the autoplay videos it has admitted was not the most respectful product to its listeners. Instead it's based on a pragmatism about advertising that was brought earlier this year by Jack Krawczyk, Pandora's former vice president of product, who said “there’s no such thing as good advertising. There's just advertising that doesn't annoy you."
To help address the problem, it overhauled its mobile display ads to automatically adjust to a smartphone’s screen size, blending images and sound as well as native video, the first of which are being rolled out by Lexus and Express this summer. Early tests have already seen users double the amount of time they spend on an advertiser’s site, claimed Widhelm.
Pandora is not without its challenges but those are mostly to do with its content costs rather than battling for ad dollars in the crowded streaming market. Spotify, Apple Music and Deezer may have listeners worldwide but where they are all battling for the same on-demand streaming pie, Pandora has its sights set on freemium radio, an area none of the others have shown any real interest to date. And yet digital radio is growing rapidly Edison Research and Triton Digital’s Infinite Dial 2015 study found that 14 million Americans listened to online radio and streamed audio content last August, including 61 per cent of all 25 to 54 year-olds.