In lieu of a quarterly earnings call, Pandora invited investors to Terra Gallery in San Francisco on Tuesday for an in-depth discussion of its new product suite, developed to breathe life back into its struggling platform.
Pandora, which has long monetized on in-stream audio and display ads, now faces a multiplying set of competitors that has caused user growth to stagnate and supply to shrink on its platform. CEO and founder Tim Westergren was brought back in late March to replace ad tech vet Brian McAndrews and turn around what investors were starting to see as a sinking ship.
Westergren planned to revamp Pandora’s product suite with services that go beyond its legacy personalized streaming radio stations. The crown jewel of those is an on-demand streaming product that competes with the likes of Spotify, Apple and Amazon.
“Advertising will continue to be an important business for us for a long time, but the quarter results support our plan to build and scale a subscription offering,” said President and Chief Financial Officer Mike Herring. “The subscription business will smooth out the unpredictability of the advertising business.”
As Pandora attempts to get its late-to-market on-demand service off the ground, it will try to grow revenue by ramping up video ads, integrating on new devices, investing in ad tech and stealing market share from terrestrial radio.
Unlocking Video
Pandora’s multibillion-dollar ad platform grew 7% year over year to $2.7 billion. But relatively stagnant listener hour growth (5% YoY) led to a culling of supply.
“Twenty-five out of our 34 markets are maxed out in terms of ad load,” Herring said.
Pandora turned to video ads to solve this problem last year, when it launched Sponsored Listening and rolled out programmatic buying across video and display on mobile and web. (Pandora still doesn’t sell audio ads programmatically, unlike its competitor, Spotify.)
With Sponsored Listening, users could opt in to 15 seconds of a video ad to unlock an hour of ad-free music. Sixty-four percent of advertisers were repeat buyers of the premium unit, which has brought in “tens of millions in revenue,” Herring said.
Then, Pandora launched features users had been asking for: song skips and replays. Like Sponsored Listening, users who opt in to a video ad are rewarded with the ability to replay songs they love and pass those they don’t.
Combined, these features increased video ad inventory on the platform by 7% and opened “high-value, viewable ads on Pandora that become fodder for our sales team,” Westergren said.
Pandora also looks to video to increase user retention, as its rich pool of first-party data powers more relevant ad experiences.
Pandora has more than 1,993 targeting segments, 416 of which are proprietary. It’s generated more than 75 billion data points from its “thumbs up” and “thumbs down” buttons, which users click to rate a song on a station.
Such a treasure trove of information will “maximize the value of the interruptive ad,” Westergren said.
It will also – arguably more importantly – be used as a proxy to upsell Pandora listeners to its mid-tier ($4.99 per month) and premium ($9.99 per month) on-demand subscription services.
Pandora’s proprietary DMP, “can choose between [serving] a product ad, an ad for a local concert or an upsell to Pandora Plus while minimally interrupt listening experience,” Chief Product Officer Chris Philips said.
New Frontiers, And Some Old
Pandora is betting big on the internet of things (IoT) to grow its footprint, so it’s steadily inking partnerships with smart technology and auto manufacturers.
So far, the streaming platform is on 1,800 connected devices, including 190 car models. Auto integrations are up 62% this quarter, while IoT is up 24%.
Auto integrations offer Pandora another potentially lucrative opportunity: stealing market share away from broadcast radio.
Pandora represents 10% of radio listening in the US. Its fastest-growing area of advertising is the local radio market, accounting for 28% of ad revenue this quarter.
“We’re going after broadcast listener hours,” Westergren said. “The broadcast industry is deeply vulnerable to a personalized listening product.”
But broadcast radio, the highest-performing medium in the US reaching 91% of US consumers weekly, is unlikely to die out soon.
Pandora hopes its product shake-up will pay off, but admitted to investors that it will still lean heavily on advertising revenue. If all goes well, ad revenue will account for 40% of total revenue by 2020.
“Ad revenue will always be a challenge, but we cannot take our eye off that ball because it’s such a competitive advantage to us,” Westergren said.
