Engage Brain Open Mind: The Secret to Pandora’s Unrivaled Internet Radio Success

The Secret to Pandora’s Unrivaled Internet Radio Success

via Mashable! by Mike Agovino on 3/18/11

Mike Agovino co-founded Triton in 2006 following more than 20 years of executive experience in the radio industry. Mike’s experience includes 18 years of service at Katz Media where he rose to become president of Katz Radio and Katz Interactive, and later, COO of Clear Channel Radio Sales.
When Pandora unsealed her fabled box, she unleashed all the evils of the world. As I read through the recently unsealed Pandora IPO, I instead see a lot that is encouraging. Pandora has opened its “box” and served notice that online radio can and will be a meaningful and profitable business.
The monthly rankings from Ando Media show Pandora with an 11 month AAS (average active sessions — roughly equivalent to “AQH“) of 440,000, from which the company generated approximately $100 million in ad sales in 2010. Then, in December, Pandora’s numbers jumped to 642,614 in AAS. That’s an enormous uptick in one month, given Pandora’s previous average. The spike bodes well for its performance in 2011. If you do some quick math, you’ll see Pandora monetizing at a rate of about $225 annually per listener.
While this number is considerably lower than terrestrial radio’s (estimated to be approximately $400 per listener annually), it has grown dramatically in just this past year. Pandora is monetizing its audience at better than half the rate of terrestrial radio, even though Pandora is still in relative infancy. It’s able to do all this while serving just three ads per listener hour.
How is Pandora getting so much traction with just a fraction of the amount of terrestrial radio’s commercial content? Here are the three reasons why.

1. Make It Interactive

Pandora is a multimedia interactive and social experience. As such, monetization does not come purely in the form of audio advertisements. In fact, audio is not even the driving force in many cases. With the Pandora audience continuously interacting with the various features enabled on its player, many visual advertising options are created and monetized. Just think of Pandora’s player as a website — because it is one.

The takeaway: Online audio can and should be a multimedia and interactive experience.

2. Target Your Audience

Pandora has sophisticated targeting capabilities which allow it to sell ads at a very high CPM. Joining Pandora as a registered user means the company is able to capture a meaningful amount of data about you. That information is then used to ensure you receive more relevant advertising. The power here is in Pandora’s ability to keep a very limited inventory and deliver advertisers high value.

The takeaway: Audience targeting creates higher value advertising.

3. Engage on Mobile

The hottest growth category of all advertising is mobile. EMarketer expects mobile marketing to hit the one billion dollar mark this year, and the Pandora audience is highly mobile. With 80 million registered users, many of whom have downloaded the mobile app, Pandora’s mobile audience is huge and growing. Highly engaged listeners let Pandora compete favorably against mobile RFPs coming from big digital agencies. CPMs in this space are very, very big because of mobile’s ability to target listeners down to their physical location.

The takeaway: An engaged mobile audience has great value for advertisers.

Pandora’s Limitations

Pandora’s IPO buzz proves the company has done a lot of things right. The audience Pandora has built is larger than any of its competitors in the online radio space, and Pandora offers a highly customized, engaging and socialized experience with less commercial interruption. All good.

For all its growth and strengths, there are limitations to Pandora’s appeal. In its current form, I personally find Pandora more of a replacement for my iPod or satellite radio than my overall radio experience. It’s more of an at-home, workout or long car drive attraction for me. Sometimes, I miss having content professionally curated or being able to sort out local content. For these reasons, Pandora can’t yet compete for my drive time listening. But I trust not everyone is like me, and I’m sure that the team at Pandora is hard at work tackling these issues.

Offline Radio

Even still, offline radio companies have yet to mount a real offense in the online game. Concerns over protecting the existing revenue base from cannibalization, protecting profit margins in highly leveraged capital structures and the burdensome expense of online music royalties have held many from dipping toes in online waters. In fact, the top terrestrial companies are growing their online audience at a slower rate than pure-play competitors. Believe it or not, some are even minimizing audiences by timing out streams and cutting off international access.

Bob Pittman, Clear Channel’s chairman of media and entertainment platforms, recently remarked at an industry conference that Pandora offered “a set of features” that he felt his company and others would soon be providing to their own online audiences. This would bode well for offline radio companies but would likely require partners, time and considerable investment. I think Clear Channel’s recent acquisition of Thumbplay’s music service shows terrestrial companies recognize it’s time to get aggressive.

I believe we will see terrestrial broadcasters dive deeper into the pool. Incumbent broadcasters would have a considerable advantage if they mobilize quickly. They maintain the overwhelming advantages of audience scale, quality content and local presence.

Consumers’ lifestyles are also quickly changing. New technologies are more elegant and simple to use, and the winds of the advertising ecosystem are blowing heavily toward digital. Terrestrial radio now shares its orbit around local advertisers with the likes of Pandora, Groupon, Patch, Facebook, Google, local portals and other pure plays. In the years ahead, the broadcast model will be challenged as smaller companies gain at least a basic level of digital sophistication. It’ll be fascinating to watch how radio responds and takes part in the market’s evolution.

Who’s Winning?

The opening of Pandora’s IPO should serve notice to all companies in the radio space — whether they’re offline, online, or both: The business opportunity here is real. To compete in and win this game, you must be truly interactive, social, mobile and highly targetable. Pandora and other companies like it pose a threat and at the same time signal an opportunity. The “box” has been opened. Now what?

Disclosure: The author’s company works with Pandora to sell audio ads on its platform.