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Pandora CFO: “The best thing that’s going to happen is…”

mike herring 01Pandora CFO Mike Herring spoke at the Wedbush 2015 California Dreamin’ Technology, Consumer Management Access Conference. In a moderated session followed by brief Q&A, Herring spoke about Pandora’s vision generally, the expansion to on-demand service in 2016, Apple Music and Steve Jobs, the company’s recent acquisition of Ticketfly, the imminent CRB royalty-rate ruling, and more.

How Pandora Is Different

“People listen to Pandora because it provides the right music listening experience.” –Mike Herring, CFO, Pandora

In general remarks about Pandora’s mission, Mike Herring drew a veiled comparison to Spotify when he said, “People listen to Pandora because it provides the right music listening experience. We are not trying to create a funnel to drive other sort of activity.” As Pandora gathers its energy for a more direct competition with Spotify next year, Herring’s opinion is that Spotify’s radio-like service, Spotify Free, is engineered to be a “funnel” driving users to Spotify Premium subscriptions. Pandora, by contrast according to Herring who touched on this point a few times, built its business on ad-supported radio-like listening, and monetizes it effectively — in other words, the ad-supported tier is Pandora’s core business, and the on-demand service planned for late in 2016 adds value to an already premium music-listening experience.

“We don’t think of it as here’s this big funnel of people, [and] we are trying to drive them into $9.99 subscription. We think of it as [a] big population of people and there’s a natural way to monetize that population through advertising, that has proven itself to be a really good business that’s growing very well and will continue to grow.”

The point of all this is to say that Pandora is approaching the hybrid service model (both interactive and non-interactive) from the opposite direction as Spotify. The two brands will be nose-to-nose by the end of 2016, both offering radio and subscription, but for Pandora the added value is on-demand listening, and for Spotify the added value is radio listening.

Apple Who?

“No one subscribes.” That backhand slap was administered to Apple Music, which Mike Herring dissed as a way to make a bigger point. “The big issue around streaming business today is customer acquisition costs, right. Apple has a unique advantage of being on hundreds of millions of phones and having 800 million credit cards or whatever they do and stuff. But if they didn’t have that, they would have to – and they spend a lot of their real estate on this phone trying to drive people to music. You can’t even get it off – it’s like a permanent thing on there and still no one subscribes.”

“Well, I guess a few million do,” he added.

Where some observers think Apple Music’s 6.5-million subscribers after three months is a strong start, Herring clearly sees it as smallball considering Apple’s big installed base advantage. You have to have a great product,” he said. “And when you focus on that then I think you have much better long-term prognosis to your business.”

Steve Who?

“There is no audience where we don’t have pretty decent penetration.” –Mike Herring

Steve Jobs didn’t escape the Apple-poking, as Mike Herring spoke broadly about the health of the music industry. “How do we bring the music industry back? It’s had a tough 15 years. I mean Steve Jobs eviscerated the music industry with the launch of iTunes and it’s been downhill ever since. And the download was supposed to save it, that didn’t happen.”

The context around this was Pandora’s acquisition of the Ticketfly live-event company. Herring explained that Pandora has Big Data about users’ music tastes, which can be deployed to sell more tickets in a win-win scenario where venues, fans, performers, and Pandora all benefit. “Rolling Stones have been doing pre-sales of their tours forever and usually about 20% of pre-sale allotments gets sold. Pandora sold 100% of the allotment, 55,000 tickets in 24 hours, not because of any other reason other than we knew exactly who wanted to buy those tickets.”

“We bring demand to the equation,” Herring said. “I think what really needs to happen is we need to think broadly how do we drive engagement overall as a music industry and that message is starting to make sense.”

The Best Thing That’s Going to Happen…

Unsurprisingly, a question came up about the Copyright Royalty Board (CRB) ruling, due any day, which will establish new royalty rates that webcasters will pay to record labels. On that topic, Mike Herring noted that no matter what, the CRB ruling would end uncertainty.

“The best thing that’s going to happen, and this is a certainty, is that we will know what the rates are for the next five years. And running a business that’s, like I said earlier, over $1 billion annual revenue business and not knowing what our largest cost line is incredibly difficult […] We can’t make fundamental business decision.”

Herring did not advocate for lower rates or argue against higher rates. He spoke of a “right rate” for the industry as a whole.

“To be honest, the right rate is really important for [musicians and labels] too, not the highest rate. If a banana costs $1,000 no one buys the banana. It needs to be at a rate, a price where someone is willing to buy it in order to feed their business.”

The right rate also fosters competition, Herring noted. “There’s a reason why there’s only a handful of music streaming companies. It’s because the costs are so prohibitive that if you are not really, really amazing at it you go out of business. That’s what happened to Rdio, right? A beautiful product, a great product, but the business is just too hard. The costs are just too high.”

 

“We want it to be a fair and rational dollar amount.” –Mike Herring

“If it’s a fair cost I think you’ll see 1,000 flowers bloom,” Mike Herring predicted, promoting the benefit of opportunity for new services. “We want to have lots of startups come into this space and that would be good for the music industry.”

Pandora in the Car

An investor asked bout in-car listening. Pandora was an early mover in the car, developing integration deals with automakers and third-party technology providers. In Herring’s view, Pandora’s in-car use will experience a serious growth curve if more cars develop their own INternet connections, so the user doesn’t have to rely on a phone.

“About 40% of cars sold in the United States today have Pandora integrated into the dash, a native, so there’s a button, you press that button. It still goes through your phone though. There’s only a handful of cars, Volvo, GM have started to launch cars that are actually connected via cell connection and so you don’t need a phone to play Pandora.”

When more cars have that native Internet connection, “we are going to see an explosion of connected listening in automobiles.”

Brad Hill

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