Broadcast group publishes attack on Pandora; we question the author, SCBA prez Thom Callahan

“Reports of my demise are greatly exaggerated,” Mark Twain wrote. Pandora execs might be thinking the same thing after reading a Special Report released by the Southern California Broadcasters Association (SCBA) entitled Pandora’s Dramatic Decline in Both Active Users and Business Model. (See it here.)

The document (which links to a set of slides about radio and streaming) is an outright attack on Pandora’s business, and suggests that radio stations hand the report to clients and advertisers, to dissuade them from advertising on Pandora. Along the way it travels a rocky path of supposition and questionable prediction that is mostly derived from general observations of Pandora’s business results and public statements.

While the argument of this report is meant to sway advertisers away from Pandora, it does not actually evaluate Pandora’s effectiveness (or ineffectiveness) as a marketing platform. Instead, it criticizes Pandora’s recent business results as documented in quarterly earnings reports; notes the reduced value of Pandora’s stock float; praises on-demand services for executing a superior business model while questioning Pandora for planning to expand into that model; and claims Pandora is “moving away” from ad-supported streaming in contradiction of Pandora’s public statements.

The report calls Pandora “imploding,” and claims that Pandora’s business model “cannot survive.”

We spoke with report author Thom Callahan, President of the Southern California Broadcasters Association, to question him about statements made in the document. He held steady in a challenging interview, and our conversation extended to thoughts about programmatic advertising and radio in connected cars. What follows is edited for length.

Are Pandora’s Financials Related to its Advertising Effectiveness?

We started by asking Thom Callahan why the report attempts to connect audio advertisers to Pandora’s Wall Street financials.

What does Pandora’s stock price have to do with its advertising effectiveness?

“Any medium or any business that has posted a $5-billion dollar loss over the past 12 months sends a red flag to any advertiser, for two main reasons. First, Pandora’s sole existence is based on investor funds. Their cost of doing business far exceeds the revenue brought in. They are dependent on investors and their stock value. This is a company that has posted a $150-million dollar loss in its operations. That has got to send a signal to any client that has made a long-term or short-term commitment to this medium.”

In the last 12 months Emmis stock has lost 80 percent of its value, and Cumulus stock has lost 92 percent of its value. Should advertisers avoid Emmis and Cumulus stations?

“No, not at all. You are talking apples and oranges. The average Emmis station in the U.S. is a very profitable concern. Here in Los Angeles, Power [106] is one of the highest billing stations in the country and manages its expenses extremely well. Stations in markets like L.A. and New York are not losing money. They are not dependent upon Wall Street to determine their future. That’s the key difference.”

Whatever Pandora’s future, why does an advertiser that is planning a national branding campaign this spring need to think about Pandora’s finances and your predictions?

“If investors start pulling away from Pandora, it doesn’t have a business. That’s a difference between Pandora and the radio business. The average radio station in the U.S. does not depend on investors. Yes, the large groups are publicly traded. But individual stations are not dependent on investors. They pay their own way, and most of them are profitable.”

I can’t tell whether you are giving radio advertisers investing advice, or marketing advice. Are they the same?

“I’m asking clients to step back from the traditional models and ask the question, where is this business going? If the criterion is audience, Pandora seems to have peaked. Let’s look at radio’s audience: 92 percent reach.”

New Royalty Rates Coming This Month

The Copyright Royalty Board (CRB) will deliver new webcaster royalty rates this month, covering the 2016-2020 period. The SCBA report predicts a rate base for 2016 much higher than what Pandora is paying in 2015, measured as cost-per-streamed-track. It claims that Pandora is “bracing investors for some horrible news,” because SoundExchange (Pandora’s opponent in the CRB process) “rarely loses its battles.”

Regarding the upcoming CRB rate announcement, you predict that the rate will be raised, because SoundExchange doesn’t lose its battles. In the previous cycle five years ago, SoundExchange achieved less than half what it asked for.

“The rates usually go up. I don’t know what the rates will be; I’m not in the guessing business.”

But you did make a prediction. You said that Pandora will see its rates increase to at least $.0020 next year, from the $.0014 it is paying this year.

“I think the rates will go up. SoundExchange is asking for $.0025. I don’t know if that will happen. But I think that a raise from $.0014 to $.0020 is not an unrealistic expectation. By the way, I cannot find a prediction from Pandora on when it will be profitable. Why do you need $300-million [Pandora’s recent cash-raising convertible note offering] if you think things are going to go your way at the end of December?”

Competitors, Business Models, and How Radio Is Sold

The report notes that Apple, Spotify, and YouTube operate subscription music services, and posed this question: “What do Pandora’s competitors know about audio advertising that Pandora does not?” 

You praise Apple, Spotify, and YouTube for their subscription businesses. But Spotify has doubled down on its advertising side even as it is operating the premium side. YouTube relies primarily on advertising, even as it now launches a membership product. Apple Music followed iTunes Radio by two years. Isn’t this similar to Pandora planning to diversify with next year’s subscription product? Your report seems to criticize Pandora, and praise its competitors, for essentially the same business planning.

“I asked a question — what do the competitors know that Pandora doesn’t seem to know? Eighty percent of their revenue comes from the ad-supported platform? Why are Apple, YouTube, Spotify, Amazon going to a subscription model?”

Pandora is also building a subscription model. I don’t understand the difference. Aren’t Apple, YouTube, and Pandora doing the same thing?

“My point is, why? Pandora has spent a lot of money hiring sales people in 35 markets. If I’m a sales person selling Pandora in Chicago? What is the company saying to me? If the revenue is starting to shift to a subscription model, as they have built a considerable ad-sales staff. If they are now diversifying, what’s going on with that commitment? Will the Pandora salesperson still be there a year from now?”

Let’s flip that question. Will the advertiser still reach out to a sales person as audio buyers increasingly move to software-driven buying platforms? Is the entire ecosystem shifting?

“That’s an excellent question. If you’re talking about programmatic buying, that makes perfect sense for that space.”

Are radio sales people vulnerable?

“Pandora is a national company. The bulk of revenue in radio is local. And the bulk of it still comes the old-fashioned way, by a sales person calling on a client and learning its needs. It’s a basic approach to the business. Programmatic holds promise for radio on a national basis. If the client wants access to the whole country, and wants to buy immediately, programmatic buying could have a point. But programmatic buying will never achieve that mass appeal with live commercials, or events. I don’t know how you jam that into programmatic. That is the key difference between selling in a streaming environment and a local radio station. The bulk of dollars in Los Angeles, and I assume in other major markets, is local.”

Your report calls Pandora an imploding business, and cannot survive. Are you predicting that Pandora will go out of business?

“I’m predicting that someone will buy Pandora. It seems obvious to me that when you have 76-million users that you’ve built up over the years, it doesn’t make sense to let that evaporate and go to competitors. I can see Apple stepping up, or Spotify.”

Connected Cars and Digital Dashboards

During the conversation, Thom Callahan noted, “Every survey that I’ve encountered says that most new-car buyers want an AM/FM radio in the car.”

But isn’t that because the American fleet is 12 years old on average, so new-car buyers are unfamiliar with digital dashboards? People like what they’re familiar with, don’t you think?

“I think you’re right. With all these new dashboards, someone has got to educate people. Every person I know who has bought a car that has Sirius XM built-in, when the trial period is over, very few continue. That’s anecdotal.”

It is anecdotal. If you listen to Sirius XM earnings reports, I think their retention is pretty good.

“Okay. It wasn’t too long ago that Howard Stern went over to Sirius XM, and Sirius XM was going to kill the radio business. He was going to single-handedly bring radio to its knees. That was…eight years ago? To this day, Sirius has a 22 share of the American listening audience, versus radio’s 92 percent. There’s a lot of noise with new mediums, and a lot of ‘what if.’ I get that.”

“We are a very healthy business. There are so many more choices that a Millennial can listen to. Yet we still reach 92 percent. We’re not saying that other mediums are bad.”

Ratings and Millennials

Are you worried about the future when Nielsen reports that the TSL for Millennials is lower than for older groups?

“Actually, I can send you a Nielsen report where we still reach well over 90 percent of 18-34 listeners.”

It sounds like you’re talking about reach. I was referring to Time Spent.

“All right. Am I worried? No. We don’t sell TSL. This business is based on an audience number. If you look at the 18-34 numbers in our market, the ratings have held up nicely in recent years. TSL, okay, if it’s a fact, it’s a fact. But I don’t think TSL is going to catch us as quickly as Pandora’s audience loss is going to catch them.”

Your report calls Pandora an imploding business, and cannot survive. Are you predicting that Pandora will go out of business?

“I’m predicting that someone will buy Pandora. It seems obvious to me that when you have 76-million users that you’ve built up over the years, it doesn’t make sense to let that evaporate and go to competitors. I can see Apple stepping up, or Spotify.”