Pandora: Betting On Radio's Failure: Why Radio Shouldn't Remain Cocky - Eric Rhoads

The opening bell clanged last Wednesday as executives Tim Westergren and Joe Kennedy and investors stood high atop the stock market floor for the IPO launch of Pandora It was an exciting day As one who was an early player in the Internet radio space RadioCentral Networks I exited the Internet radio game about the time Pandora was starting 11 years ago It39s fun to see an Internet radio startup launch an IPOThough Pandora39s stock NYSE ticker symbol P debuted strong at a 40 percent increase the reporters at CNBC were pressing for answers quotHow is Pandora going to make moneyquot CEO Joe Kennedy repeatedly responded that Pandora is building a longterm business and focusing on the listener experience The reporters would not let up asking the same question 20 different ways trying to get an answer Kennedy continued to talk about how Pandora has 3 percent of all radio listening and that its intent is to grow because radio listening is strong making up 80 percent of all music listening But the reporters kept asking Kennedy and other executives to show them the money Not once did anyone say Pandora plans to make money It was like a retro repeat of the dotcom boom days when no one cared about making a profitAnd by the end of the week it looked like those reporters39 doubts were spreading to investors Pandora closed Friday at 1340 far below its 16 IPO pricePandora preIPO investors have put 91 million into the company and no profit has been made even with a claimed 90 million registered users Unlike the traditional radio model which has 4050 percent margins and is not penalized in royalties for every listener it adds Pandora has to pay bandwidth fees for every minute of streaming and artist royalties for every listener to every song it plays Pandora must find a way to make money without growing its listening base which means more paid subscribers like Sirius XM or more ads Of course the relative lack of ads is a big consumer attraction to PandoraSo where is the secret sauce Why have serious investors who are not likely to be rattled by the volatility of the public markets put big money into PandoraThose investors believe in the strength of the radio business and they believe the core premise of pushing radio programming via transmitters is flawed for the future They are betting on consumers and advertisers falling out of love with terrestrial radio They are betting that radio will cling to the world it has always known and won39t make the digital shift required to please advertisers and consumers and that like newspapers radio won39t be able to survive without cannibalizing itself These investors are expecting that radio like so many other nondigital businesses will experience a sea change in its business model once connectivity and Pandora become ubiquitous in homes mobile devices and cars They expect terrestrial radio to go the way of travel agencies and film for camerasSo why did the bloom come off Pandora39s rose so quickly after its exciting opening Perhaps the reality of Pandora39s unprofitability simply sank in a day late and some analysts are saying they39re relieved because the rapid turnaround may be a sign the IPO market is not in danger of becoming quotoverheatedquot while others say Pandora violated a very basic tenet Don39t go public if you39re not making moneyBut this is not a reason for terrestrial radio to get cocky The people who have put tens of millions into Pandora are no foolsI once attended a function with a group of Silicon Valley venture capitalists where an investor in Facebook was asked about revenues He responded quotWe39ll worry about that later Our primary goal is to build a strong and loyal base of usersquot Though I wanted to snicker I also knew there was some sense in what he was saying After all most of the radio industry snickered when XM and Sirius emerged I cautioned radio to not be overconfident or flip about satellite radio while we were saying people wouldn39t pay for the service nor would satellite make any money on advertising Yet Mel Karmazin has made the company profitable and had topline revenues of 28 billion in 2010 just ahead of Clear Channel Though I recently made the point that Pandora is not radio looking primarily at the differences terrestrial radio should be focused on since Pandora can do a better job at commercialfree music I don39t think our industry should write it off as a fad or a fluke Pandora is about to ramp up is opening local sales offices in your market just like Google Yahoo Groupon and LivingSocial have and plans to capitalize on its popularity to bring advertisers on board Though we can defend our position with statistics we must not forget that all buying decisions have an element of emotion especially at the local level A year ago my eyes were opened at a local community street fair when three bright green Groupon vans pulled up and about 20 college kids in Groupon shirts started handing out prizes It was an eyeopener that an Internet company was penetrating locally and doing radiolike street promotions We also must not forget that Pandora can make money on things other than audio commercials like player ads and direct marketing to its user base Why not compete with Groupon What if Pandora starts doing radiolike promotions in local markets like Groupon is doing Would a direct attack on a core radio strength bring back its appeal to investors And what will Groupon39s planned IPO look like Though it39s tempting to grunt about how radio is strong and will always be strong and how Pandora will be like so many other fad products that challenged radio I39m also a realist Pandora is funded by some of the smartest investors in Silicon Valley These investors are used to hearing people laugh and ask how they plan to make money yet they usually figure it out I may have been 10 years too early into the online radio business but I still believe that radio must not ignore the challenge that online radio may someday become a real competitor Jerry Lee may be right that he cannot monetize streaming radio today and it may not be reasonable for terrestrial radio to expect to make money on streaming But that39s assuming nothing changes Like all other industries impacted by the digital world we may someday see a shift At the root of all of this is the fact that radio is strong and everyone wants to take a piece of our revenues When everyone is targeting you it39s easy to get cocky and say quotThey all want to be radio but they39ll never figure out how to steal it from usquot Yet my belief is that when smart people are after you there is a chance they will find your vulnerabilities and find a way to take away your golden goose A little paranoia is healthy Being proactive is smart business just like it39s smart not to ignore a new competitor entering the market Radio39s new competitors are hoping you39ll ignore them and remain confident that radio can39t be touched That39s all the more reason radio needs to stick to its knitting and make sure we as an industry continue to serve our listeners with what they want It39s why we must continue to be entertaining engaging and locally involved Those key factors built our loyal audiences and it will be those factors that keep them loyal But we also must continue to innovate and play hard so we can compete in a digital world Being cocky and not paying attention is how we could allow others to take away our dominance Others like Pandora are counting on itB Eric Rhoads is CEO of Streamline Publishing Inc Rhoads writes regular columns for his publications and is an active blogger in the radio and art industries including Radio Ink Tank Artist Marketing and Blue Chip Gallery Marketing He is an active speaker consultant and advocate in the radio art and technology industries and he sits on a number of advisory boards Eric can be reached at ericRadioInkcomRead all Ericamp8217s MediaBizBloggers commentaries at Ink Tank with B Eric RhoadsCheck us out on Facebook at 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