Pandora may soon launch an on-demand service

Steven Loeb · August 19, 2016 · Short URL:

The company has been struggling to keep users on its radio-model, and was recently passed by Spotify

Pandora was once the king of the music streaming space, but the company has started to lose its grip, and some users. So perhaps it was inevitable that it would eventually have to start changing up its model to keep up with increased competition. 

The company already went ads-free with the launch of Pandora One in 2009, but now it's going a step further, and is close to signing deals with record labels to launch an on-demand service, according to a report from the Wall Street Journal. 

The plan would cost $10 a month, and give users the ability to listen to whatever they want, whenever they want. Until now, Pandora has acted as a radio service, where users would pick a genre, or an artist, and Pandora would pick songs for them based on that theme.

The radio model served the company well at first, as Pandora became the largest music streaming service, as well as the only one to go public.

More recently, however, due to increased competition from on-demand services like Spotify and Apple Music, Pandora's fortune's started to turn. User numbers stagnated, while losses began to mount. 

For 2015, Pandora's active listeners were 81.1 million at the end of the fourth quarter of 2015, compared to 81.5 million for the same period of the prior year, a loss of 400,000 users.

The problem with decreasing user numbers is easy to figure out; there is a lot of competition in the music streaming space these days, and there are only so many ears and only so many hours to listen. Apple Music, which only launched last year, has at least 15 million users, and Spotify has grown so rapidly that it has now outpaced Pandora, crossing 100 million users at the end of June. 

While copying Spotify's business model might help Pandora fight to gain back some of those users, it won't help in another, more troubling department.

For the full year 2015 the company had $1.2 billion in revenue, up from $920.8 million in 2014. However it still managed a net loss of $170 million for the year, up from a net loss of $30 million the year prior. Despite taking in a very healthy amount of revenue, Pandora was seeing its losses increase. 

The issue comes down to royalties. In September of last year, then-CEO Brian McAndrews revealed that Pandora had paid out a total of $1.5 billion in royalties, and $500 million through the first nine months of 2015 alone.

Launching an on-demand service meaning signing deals with major record companies, and that could add to the company's already high costs. 

Altering its business model isn't the first move Pandora has made to save itself. Earlier this year it completely revamped a major portion of its executive team, including its CFO and COO, while also bringing back co-founder, and former CEO, Tim Westergren, to lead the company. 

Right before that, reports came out that the company was shopping itself around, but once Westergren came on, he said, unequivocally that, no, the company isn't for sale. In fact, he hinted at the moves that Pandora is reportedly making in Pandora's Q216 Earnings Call in July.

"In Q2, we continued to execute on our plans while crossing several important milestones. We continue to have very productive negotiations with the three major labels, as well as with our partners in the independent label community," he said.

"Although these discussions are confidential, we believe they will result in our being able to deliver the product we want with the right business model, and that the investments we are making today will lead to win-win results as they are delivered, both for Pandora and the music industry as a whole."

This new on-demand service could be launched at early as next month, with initial roll out in the United States, then other English-speaking countries, before launching more broadly. 

Investors are reacting positively to this news, as shares of Pandora have risen 3.48 percent to $13.38 a share. 

A spokesperson Pandora would not comment on this report. 

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Pandora, the leading internet radio service, gives people music they love
anytime, anywhere, through a wide variety of connected devices: laptop and
desktop computers, smartphones, connected BluRay players, connected TVs,
etc. Personalized stations launch instantly with the input of a single “seed” –
a favorite artist, song or genre. The Music Genome Project®, a deeply
detailed, hand-built musical taxonomy, powers the personalization or
Pandora. Using this musicological “DNA” and constant listener feedback
Pandora crafts personalized stations from the more than 800,000 songs that
have been analyzed since the project began in January 2000.
More than 75 million people throughout the United States listen to
personalized radio stations for free on Pandora through their PCs, mobile
phones and devices such as the iPad, and connected in-house devices
ranging from TVs to set-top boxes to Blu-Ray players. Mobile technology has
been a significant factor in the growth and popularity of Pandora, starting
with the introduction of the Apple app store for the iPhone in the summer of
2008. Pandora instantly became one of the most top downloaded apps and
today, according to Nielsen, is one of the top five most popular apps across
all smartphone platforms.

Pandora is free, simple and, thanks to connectivity, available everywhere
consumers are – at the office, at home, in the car and all points in between.
In 2009 the Company announced that Pandora would be incorporated into
the dashboard in Ford cars via SYNC technology; GM has already followed in
announcing plans to integrate Pandora into its vehicles and Mercedes-Benz
introduced their Media Interface Plus device that works with the
free Pandora iPhone app to provide direct control of Pandora from in-dash
stereo controls. This was all great news for the millions of Pandora listeners
who had been plugging their smartphones into car dashboards to listen to
personalized stations while driving. More than 50 percent of radio listening
happens in the car, making it a crucial arena for Pandora.

Today tens of millions of people have a deeply personal connection with
Pandora based on the delight of personalized radio listening and discovery.
These highly engaged listeners reinforce the value Pandora provides to: 1)
musicians, who have found in Pandora a level playing field on which their
music has a greater chance of being played than ever before; 2) advertisers,
who benefit from the multi-platform reach of Pandora, as well as its best
practices in targeting consumers for specific campaigns; 3) the music
industry, which has found in Pandora a highly effective distribution channel;
and 4) automobile and consumer electronics device manufacturers, who have
noted that incorporating Pandora into their product makes it more valuable
to consumers.

Pandora continues to focus on its business in the United States. The radio
arena has never been hotter, thanks to technology that enables radio to be
personalized to the individual and more accessible than ever before. Right
now millions of people listen to Pandora in the United States and we hope
someday to bring Pandora to billions of people around the world.

• 2000 – Tim Westergren’s Music Genome Project begins.
• 2005 – Pandora launches on the web.
• 2008 – Pandora app becomes one of the most consistently downloaded
apps in the Apple store.
• 2009 – Ford announces Pandora will be incorporated into car
dashboard. Alpine and Pioneer begin selling aftermarket radios that
connect to consumers’ iPhones and puts the control and command of
Pandora into the car dashboard.
• 2010 – Pandora is present on more than 200 connected consumer
electronics devices ranging from smartphones to TVs to set-top boxes
to Blu-ray players and is able to stream visual, audio, and interactive
advertising to computers, smartphones, iPads, and in-home connected