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A talk with the founder of Pandora Tim Westergren about his push into local advertising

pandora1I first met Pandora founder and creator Tim Westergren in 2007. He held a “meet up” with fans at Defoor Center. About 150 enthusiasts showed up.

The company was ultra cool but losing money and fighting over royalty payments that were sucking the company dry. In 2008, Apple released the iPhone - and saved Pandora.

In the not-so-distant past, people were tethered to their desktops and laptops to listen to Pandora. Now they could be anywhere. And as Wi-Fi, 3G and ubiquitous access to the Web became the norm, Pandora’s app became a standard pick up. Registered users, regular users and actual listening time soared.

More than 150 million people are registered and at least 50 million check in at least once a month.  The average person who tunes in spends 18 hours a week with Pandora, much of it via smartphone. It’s the second most popular app out there.

I caught up with Tim again last month while he was in Atlanta for a special Pandora concert featuring rapper Yelawolf at the Loft.  His company is now public. It’s still losing money and the stock is below its initial offering price. But he feels far more comfortable about his position in the musical landscape than in 2007.

“The last six to nine months, local advertising has been blossoming,” Westergren said.  He now has two Atlanta-based sales staff, both former employees at local radio stations. He is investing money to add more local sales people in major markets.

His sales pitch for advertisers: it can be far more precise than FM radio. “You can break it down by gender, by age, by zip code,” he said. Types of advertisers include car dealers, mattress companies and local grocers. “I don’t feel there’s a category that’s particularly averse to it.”

Westergren, a musician/businessman, still faces a major problem with his business model: the huge fees Pandora has to shell out to SoundExchange, the non-profit middleman between artists and non-interactive streaming music services. While FM radio stations only have to pay songwriters and publishers, anyone streaming online has to pay labels and performers as well. This inequity has hobbled online operators like Pandora for years. (FM stations decades ago somehow convinced labels this was okay because radio was free promotion. With so many other options for music promotion, this argument is far less compelling.)

More than half of Pandora’s revenues go to paying those performance fees. Yet only five percent or so goes to songwriters.

“This isn’t an issue of survival but fairness. It really doesn’t make sense,” he said.

Westergren has lobbied Congress to try to lower those rates though right now, changes can’t be made in a regulatory way until 2015.

For the first time, radio companies that rely heavily on FM stations are starting to create their own private off-the-table deals because increasingly, more people are listening to radio on smartphones, forcing those big companies to pay up as well.

Clear Channel last month signed a deal with Big Machine Label Group (Taylor Swift, Tim McGraw, Rascal Flatts) that involves payments for sound recordings, specifically through advertising revenue sharing.

“Today, 98 percent of our listening is terrestrial broadcast and 2 percent digital — with record labels and artists only paid for the 2 percent.  This new agreement expands label and artist participation from just digital to terrestrial broadcast radio revenues in one comprehensive framework that will give all of us a great incentive to drive the growth of the digital radio industry and allow everyone to participate financially in its growth. This market-based solution helps bring the best in music to radio listeners wherever they want to hear it.”

- John Hogan, Chairman and Chief Executive Officer of Clear Channel Media and Entertainment.

“It’s validating,” Westergren said.

Another limitation: Pandora is stuck in the United States, has struggled to get into other countries. “It’s been a huge source of frustration,” he said. [Since I spoke to Tim, Pandora has started beta versions in Australia and New Zealand.]

More than one million people listen to Pandora in Atlanta now any given month, with comparable reach to a radio station in Atlanta such as Fish 104.7 or Kicks 101.5. It has grown markedly from 2010, when it began making apples-to-apples ratings comparisons to AM/FM stations.

Westergren notes that 80 percent of music listening is still via radio – including the likes of Pandora.

Pandora, which is free, has its eyes set on old-school radio but is hardly immune to hungry on-line only competitors as well. There’s Spotify and Rhapsody, which provide on-demand, subscription models, along with traditional radio apps such as TuneIn and IHeartRadio. But Pandora for now remains top digital dog.

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By Rodney Ho, Radio & TV Talk

One comment Add your comment

A Different Jeff

July 31st, 2012
8:02 am

Pandora is great for when I’m at work. I don’t have to worry about reception, and I’ve got 8-10 customized stations that play songs I enjoy. Even better is that there’s almost no ads to speak of, and when there are ads, it’s one ad after 6-7 songs, not 3-4 songs plus 6-7 ads like terrestial radio.

Spotify is a nice program as well, though I usually use it when I want to hear a particular song.