Pandora Chief Focuses on Personalization, Ease of Use as Premium Differentiators
Pandora is banking on ease of use and personalization to carry its Premium on-demand music service that's to roll out by the end of March, said CEO Tim Westergren on the company’s quarterly earnings call. Responding to a question on what gives the company confidence it will be successful converting listeners to its Premium service amid competitors' inability to achieve anticipated growth levels, Westergren referred to Pandora’s size, quality of audience and the ability to “message to them contextually.” Overall, premium music streaming services haven't reached expected growth levels because “the products are very hard to use,” he said Thursday.
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On how the streaming provider will differentiate, Westergren said: “When you launch Premium, it doesn't start with a search box that says 'get started.' It's not 40 million songs and good luck.” The current Pandora listeners who the company hopes to transition to the premium service -- either advertising-supported or those paying $5 per month for Pandora Plus -- will see a webpage prepopulated with their music preferences, “so all the stations you've created, all the songs you've 'thumbed' are right there for you to access,” said the CEO.
Westergren contrasted that with the “time intensive, labor intensive” job of sorting through millions of songs on other premium services, which he said contributes to high churn rates. “People do it for a while,” then run out of time and don’t want to make the effort, he said. “We think Pandora's going to be very unique,” he said, citing simple operation and personalization that’s “unprecedented.” Westergren compared Pandora’s imminent on-demand service to its launch of “personalized” internet radio: “We're going to do the same thing all over again here.”
Determining which customer fits which of Pandora’s three offerings is like “one gigantic math problem” that the streaming music company has “a lot of weapons” to solve, said Westergren: The goal is to achieve “lifetime value” for listeners and find them the best option. “It’s not necessarily about jamming everybody into a subscription product; if that leads to higher churn that’s not actually a wise financial move.”
The company starts every quarter with 100 million listeners “we know a ton about,” said Westergren, and unlike other subscription businesses, Pandora has a “profitable tunnel” with its ad-supported business. A Pandora team will target listeners with a “propensity to subscribe,” but that’s not necessarily people who use the service the most, he said. How listeners use the service is equally important, he said. “Are you somebody who goes offline a lot, keeps running out of skips, searches a lot for an individual song?” The latter is likely a candidate for the on-demand service, he said. Pandora’s data science also factors in how valuable ad-supported listeners are in “hours control,” and listeners who are difficult to monetize likely will have to “work harder for remaining an ad-supported listener on Pandora,” Westergren said.
Responding to an analyst’s question on Sprint’s investment in competing on-demand music service Tidal (see 1701230023), Westergren said, “If you were standing in my shoes, you'd be looking for distribution all day long right now.” Sprint’s one-third investment in Tidal says that music is “the killer app” to bring added value to carrier offerings and help drive engagement and data consumption. Such partnerships are “becoming a lot more attractive than they used to be, but you can bet that we're looking at all of those options.”
Q4 revenue of $392.6 million was a 17 percent increase over the 2015 quarter, it reported. Ad volume grew 16 percent to $313.3 million; subscription and other revenue was up 5 percent to $59.8 million; and ticketing service revenue rose 20 percent to $19.4 million.
Wedbush Securities analyst Michael Pachter maintained an “outperform” rating on Pandora in an investor note Friday, saying Q4’s upside was “more than overshadowed by lackluster Q1 guidance.” Pandora Chief Financial Officer Mike Herring guided to Q1 revenue of $310 million to $320 million and an adjusted EBITDA loss of $80 million to $70 million. Wedbush expects losses through most of 2017 for Pandora as it invests in on-demand music and transitions to the three-tiered service model.
The ability in Q4 to transition 375,000 ad-supported users already in its user base, without added subscriber acquisition costs, to Pandora Plus “underscores its ability to do the same with on-demand once it rolls out the service in March,” said Pachter, who said Wedbush’s 2017 revenue estimates “may prove to be conservative.” If Pandora can convert users to on-demand more rapidly than modeled, profitability could be achieved earlier, the analyst wrote, but “we have consistently been overly optimistic in the past, assuming cost cuts beyond what Pandora can manage.”
Macquarie Capital analyst Amy Yong is modeling subscription revenue of $58 million in Q1 and $319 million for the year, based on the late quarter launch of Premium and estimates of about 6 million Premium and Plus subscribers in Q1. Westergren said Pandora needs to have between 6 million and 9 million subscribers to achieve Q1 guidance. “Pandora seems sandwiched between unease around the launch of Premium and M&A gamesmanship,” said Yong, who maintained an "outperform" rating. "With M&A prospects fading, we see execution on its three-pronged strategy as key."
Shares closed up Friday 1.7 percent to $12.84.