Now Rocking My Phone

August 12, 2008

by atremble

Last month Pandora launched an iPhone application that has revolutionized a corner of my world. The service is already the 4th most popular application on the phone (first in music) and it drove a record 3.3 million songs streamed in one weekend to iPhone listeners alone. Yet it has no ads. Given that Pandora’s revenue model depends on clever advertising with high CPMs, how can Pandora afford the royalties and bandwidth? One explanation is to view the launch as a massive—and massively successful—marketing expense until the user base can be monetized.

It’s not yet clear how Pandora and Apple plan to do this. Pandora claims that the iPhone Application Store does enable ads at the time of downloading, but how would this measure against the impressions and CPMs that Pandora generates online? This approach doesn’t add up. One more likely avenue is the intermittent display of ads within the application itself—taking launch screen or cover art real estate, for example. It’s inconsistent with the controlling nature of Apple to let this happen unabated, however, and it would certainly interfere with Apple’s brand management.

The most dreaded alternative is the interruption of music. Long before this happens I would expect Pandora to charge for its mobile software, or for Apple and its plumber AT&T to share data plan revenue with Pandora. After all, the software is a big win for all three, not to mention a flashy counterpoint to the new, higher priced iPhone data plan.

Meanwhile the popularity of the app continues to drive Apple customers to Pandora and vice versa. Both companies are thriving with such differentiation (note that Last.FM, a Pandora competitor, also has an iPhone app available). Through this technology and a multitude of other capabilities, the iPhone has reduced my use of a computer at home by more than 50%. My loyalty and evangelizing have also increased—finally true innovation and convergence in mobile technology!

So when does Pandora start worrying about the costs? Maybe never. If the service continues to grow and new users also migrate to the online version (while at work, for example), Pandora can likely defend its margin through one or a combination of the options above. For me, the era of purchased music is officially over.


3 Responses to “Now Rocking My Phone”

  1. Joseph Young Says:

    atremble, great post. I think the advent of mobile computing will definitely emerge in our generation.

    The other driver of revenue on the internet that you forgot for Pandora is referrals. Pandora has multiple revenue streams: one through advertising, and another through referrals. Pandora (and other music discovery services) on the iPhone will make their money through referrals to the iTunes store. Each time someone discover a song they enjoy on Pandora and want to buy it, it goes straight to the iTunes store for purchase and then directly onto your iPhone media library. Talk about seamless integration. The record labels will take a cut, as will Apple; but so will Pandora. Reducing the barrier to purchase through this ecosystem will be a win for everybody: businesses and consumers.

  2. A Tremble Says:

    Great point, Joseph. I neglected to mention affiliate revenue. As of a year ago, however, affiliate (or referral) revenue in this industry was minor in comparison with ad-driven dollars. I would be curious to know how the iPhone application impacts the rate of affiliate sell-through for Pandora.

  3. atremble Says:

    AUTHOR’S NOTE: Just days after this post, the dialogue about Pandora’s future reached a discouraging low in publications like the Washington Post and the Unofficial Apple Weblog. For nearly two years, internet radio broadcasters have battled Sound Exchange, which represents music rights holders (not musicians), over the royalties charged by the music industry.

    Sound Exchange has imposed rates on internet radio that are close to double those paid by terrestrial and satellite radio. Even more troubling is a minimum $500 annual fee per station. For a service like Pandora that is based on personalized stations created by each user (I have more than 50 myself), this is a business model killer. Pandora has stated openly that unless congress can overturn such shortsightedness, the company will be unable to return value to its investors and forced to shut down. The same death awaits lesser and niche broadcasters.

    This is the music industry at its worst: killing the most innovative force in music since the iPod platform so that dinosaurs in Los Angeles can avoid evolution. Of course, Pandora’s model could evolve as well (public radio-style ads have already been foreshadowed). If Michael Arrington’s fear is realized and Pandora becomes the sacrificial lamb of the music business, this debacle has the potential to become the greatest travesty in digital music to date.

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