The most informative part of quarterly earnings calls can be the Q&A with investors, for the strategic story beyond the financials. Pandora’s recent Q4 call (our financial report here; key strategic points here) was important as the most extensive Q&A discussion after the Copyright Royalty Board (CRB) ruling (our extensive coverage here), and just as Pandora starts the pivotal work of creating an on-demand service in 2016.
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Following are some of the insights, perspectives, and forward projections voiced by CEO and Brian McAndrews and CFO Mike Herring in last week’s responses to investors.
Listener Growth
McAndrews and Herring have fielded questions about listener growth for several consecutive quarters as Pandora’s once-meteoric audience ascension has settled at a plateau of about 80-million unique monthly users. Throughout, Pandora has focused more on growing its monetization of users, the key metric for which is revenue per thousand listening hours (RPM). When asked last week about audience size, Brian McAndrews again dampened expectation of a rising trendline in audience size.
“We’re not expecting significant growth in 2016 because of the competitive environment and continued existence of free on-demand services and significant competitive spending. But we are investing to maintain growth and we do expect to see some continued increase in engagement.”
When it comes to engagement, McAndrews mentioned consumer electronic devices, in-car listening as increasing listening time per user. Mike Herring noted an imbalance between Pandora’s overall share of radio listening and its share of in-car listening, saying that the imbalance represents opportunity:
“Our overall market share past 10% for radio listening in the U.S. and yet it’s under 2% in cars and cars represent nearly half of radio listening. So as we continue to grow in cars and we’ve seen significant increase in our number of integration as these cars become connected kind of the final phase and the user experience continues to get better and better, we think we’ve just tremendous upside there.”
“We think we can get to 100 million listeners in the next three years to five years,” McAndrews said.
On the subject of listener engagement, the new Thumbprint feature, and the company’s exclusive streaming deal with hit podcast Serial got mentioned. Thumbprint is the second most listened-to station on Pandora, and the first four Season 2 episodes of Serial attracted five-million listeners, about the same number as iTunes downloads for the first five episodes of Season 1.
Licenses and Labels
Pandora has finalized direct music licensing deals with most major publishers, signaling a departure from the company’s historic reliance on statutory licensing. In 2016 Pandora must turn that record of success to the label side of music rights-ownership, separating from the CRB licensing rates for the prospective on-demand service it will build on the technology backbone of Rdio that was acquired from bankruptcy court in November.
CFO Mike Herring: “Half of the two licenses that you need to achieve that are now under our belts and it’s important that we find the right win-win solutions now with the labels and the sound recording industry.”
One investor asked an interesting question. Is there any fundamental difference between Pandora and the music labels about how the industry should be structured? that question launched Brian McAndrews on a thoughtful soliloquy.
“I think it’s a matter of finding the right balance. Certainly having the CRB behind us is a great benchmark […] It’s about the music industry really understanding what their strategy is in terms of how music is going to be distributed and how it should be available to consumers in this new world […] We’ve reached out and found the right balance with the publishers and I think we’ll find out with the labels as well. […] If it was just Pandora and the labels in a vacuum, maybe things would be happening quickly, but there are obviously other players in here that also are negotiating with the labels at the same time. And I think eventually we’re going to get all these things to sort out, but in the meantime, we’re well set to operate well this year. We’re not under any sort of gun. We’re willing to work with them, and are having the right conversations, and I think we’ll get there.”
Someone asked about Spotify. “We don’t have any insight into their negotiations as to what rates they are asking or what rate they have been being paying historically,” McAndrews said.
Revenue
As mentioned above, revenue per thousand listening hours (RPM) is an imperative leading metric in Pandora’s self-assessment. The earnings drumbeat gives investors a quarterly opportunity to ask about ad loads. Last week the question came from Michael Graham of Canaccord Genuity, a financial house that has been bullish on Pandora. Mike Herring talked about Pandora’s ad load and a projected growth of RPM.
“At the current ad loads we’re at now, averaging in this high-value demos and areas, five or five and a half ads at the most on a per hour basis, it will grow well into the $70, $80, $90 RPM. We’re very confident we can do that […] It is true though that as we bring new products to market from a paid services perspective, it will give us more leeway to increase ad load […] As we over time increase ad load, and we have other products to offer them at that time, we want them to be able to make a choice to stay within Pandora, have best-in-class radio products, lean-back products, but also significantly differentiated other new music services on-demand and otherwise that they’re willing to pay for it. And once those are available, I think we’ll get much more aggressive in terms of monetizing service.”
Herring also spoke about Pandora’s advantage in the post-CRB environment that has proved unfavorable to smaller webcasters. In his comments below, LPM stands for licensing cost per thousand hours, and is a direct complement to the RPB (revenue) metrics.
“[The new CRB rate] takes it from the LPMs that we were paying at around $25 in 2015 to new LPMs around $32. So it’s a big number that changes year-over-year, but then it stays there and that’s where the real advantage to Pandora is, is we now have clear and fixed rates that we pay. This is a problem for anybody else. And if you’ve been reading any of the music trades, many small webcasters shut down on January 1, because a $32 LPM for them is impossible […] The reality is Pandora, because of our advertising prowess and because of our engine that we’ve built over these years, we already have RPMs well in excess of that $32. We the exception that can survive and thrive in a cost structure that looks like that. That’s a huge competitive advantage for us […] all the good work that we’ve done the last three years is not for nothing, it put us in a situation to now thrive over the next five.”
