Pandora Expects 30 Percent Upsell Rate From Upcoming On-Demand Service

Pandora Premium is a “full, interactive on-demand service,” said Westergren. Radio will be at the core of Pandora Premium, which will have all the features of Pandora Plus -- the ability to rewind, skip songs and listen offline. Premium will add the ability to search and play, build and share playlists, take “everything offline” and include “many more Pandora-esque features” that Westergren wouldn’t disclose. The company will “reinvent” the interactive streaming music experience in the same way it did online personalized radio, he said.

Premium is part of what Westergren called Pandora’s “three-legged stool” of music offerings that also includes the existing advertising-driven free service and its recently tweaked $4.99-per month Pandora Plus. The related services created a “great upsell path” for existing users, he said. Pandora has 78 million users listening to an average 22 hours of programming per month on more than 1,800 devices and 190 car models, he said. Westergren said the ecosystem is expanding as new connected products emerge. Pandora is now available on internet refrigerators and hot tubs, he said.

Pandora has 55 percent of total U.S. music streaming hours vs. 32 percent for Spotify, 8 percent for iHeart Radio and 5 percent other services, Westergren said. Of total U.S. radio listening, Pandora has 10 percent share vs. 79 percent terrestrial radio, 8 percent satellite radio and 3 percent other internet radio, he said. Pandora forecasts it will reach 11.3 million on-demand subscribers by 2020, out of the 51.3 million subscribers projected by IHS in that time frame.

To support growth projections, Chief Product Officer Chris Phillips touted Pandora’s “intelligent interruptions” that calculate the best time to break into the content stream. The algorithm calculates the best time to serve listeners ads, ticket offers or upsell messaging according to time of day, the type of device they're using and their listening habits. When some younger users first get on Pandora, Phillips said, they typically change stations and skip a number of songs as they’re trying to “settle into their music.” That’s not a good time to serve an ad, he said, but once they find the music they like, they’re more receptive to an interruption, he said.

Uber has become Pandora’s fifth-largest auto platform, said Phillips, reviewing the company’s strategy to outfit drivers with the Pandora app so music plays through the car’s speakers. It followed by opening the app for listeners, he said. In a rider’s Uber app, she can see what the driver is listening to on Pandora when the car pulls up, along with driver's name and car model. “You can continue jamming, or flip it over to your stations." The Uber offering is ad-supported, he said.

Pandora has taken the inventory of Ticketfly, which it bought last year for $450 million, and is serving it to listeners based on listening preferences, thumbs-up ratings and location, said Phillips. A user visiting New York will get notifications of favorite artists playing live nearby -- or coming soon -- while she's in town, he said.

Pandora believes the $9.99 on-demand offering will be “relevant” to as many as 30 percent of its ad-supported listener base. Other on-demand services are “too cumbersome,” to use, Phillips said, requiring users to “do a lot of work” to find music, put it on a list and then add it to a playlist. Pandora’s personalization features “down to the individual level” will set it apart, he said. When a listener loses a signal, Pandora automatically switches to offline mode, he said.

The company has a built-in base of listeners who already know how to navigate Pandora, Phillips said. “It will be familiar.” Pandora users won’t have to choose “lean in” or “lean back” modes. Instead, Pandora will blend listening experiences and do it for them, he said. “We can mix favorites with discovery,” he said. Pandora engineers are working on probability models for users based on their usage patterns that know their willingness to subscribe or trial, what time of day they listen and which type of music they’re listening to when they might convert, he said.

In Q3, Pandora’s total listener hours grew 5 percent to 5.4 billion, from 5.14 billion in the year-ago quarter, and active listeners slipped to 77.9 million from 78.1 million, said the company. Revenue in Q3 was $352 million, up 13 percent year over year, but at the low end of company guidance due to a weak digital advertising environment, said Chief Financial Officer Mike Herring. Advertising revenue was $273.7 million, up 7 percent year-over-year, subscription revenue slipped 1 percent to $56.1 million and ticketing service revenue grew 25 percent to $22.1 million, Pandora said. The Q3 $61.5 million loss compared to an $85.9 million loss in Q3 last year, Pandora said.

Revenue was 4 percent below Cowen and Co. estimates, said analyst John Blackledge. Pandora is calling for revenue of $362 million-$374 million in Q4, but Cowen had projected $385 million.

Cost of revenue in the quarter grew to $211 million from $174 million in Q3 2015 due to content acquisition costs related to settlement (see 1510230069) of a copyright lawsuit brought by music labels Universal, Sony, Capitol Records, Warner and ABKCO. Pandora paid $60 million in October 2015 and then $7.5 million in December, March, June and September, it said. It also paid $23.9 million in content acquisition costs to reconcile royalty payments due the American Society of Composers, Authors and Publishers and Broadcast Music Inc. (see 1512220015).

Shares closed down 3.3 percent Wednesday to $11.77.