Pandora’s plans to launch an on-demand music-streaming service in the US are several steps nearer this afternoon, thanks to the company’s latest licensing deals.
Pandora has signed direct agreements with major labels Sony Music and Universal Music, as well as with indie licensing agency Merlin, digital distributor The Orchard and more than 30 other indie labels and distributors.
The deals leave Warner Music as the remaining major label that Pandora needs to sign up before launching its multi-tier on-demand service, with the company already having tied up agreements with ASCAP, BMI and music publishers.
One key point: the deals announced today cover the US only, so Pandora will need expanded global agreements before it can launch its new offerings elsewhere in the world.
“This was a truly collaborative attempt to find a solution that would support artists while profitably growing our respective businesses,” said Pandora CEO Tim Westergren in a statement.
“And that is exactly what we achieved. Working together, we can reshape the digital music market and grow a great business that provides tremendous value to the music industry for decades to come.”
As you’d expect, the labels involved are bullish about the potential for Pandora’s planned expansion in their public comments.
“This partnership should be a very encouraging sign for the entire industry,” said Sony Music boss Doug Morris. “Pandora is a company founded and run by a musician. We are naturally aligned and look forward to growing the music business together and collaborating to support our artists in the digital era.”
“Working collaboratively, we have created a thoughtful partnership that enables innovation and has the potential to delight music fans and benefit the entire music ecosystem of recording artists, songwriters, labels and publishers,” said Universal boss Lucian Grainge in his own statement.
“We are very pleased to broaden our relationship with Pandora, and to see additional revenue opportunities being created for our members,” said Merlin’s Charles Caldas. Merlin was one of Pandora’s first direct deals back in 2014, incidentally.
Despite recent speculation about an acquisition of Pandora, the company is laying grand plans for its subscription expansion.
Westergren outlined the plans in his keynote appearance at the Midem conference in June. “We stream more hours of music a month than YouTube streams hours of video,” he said.
“There’s this huge endemic audience on Pandora, and because we know their taste, we’re going to go into that business but not like everybody else: 30m songs and a search box and good fucking luck!” said Westergren. He added that Pandora intends to launch “multiple tiers, not just $10 a month, but something lower as well”.
“We don’t think of one price that’s going to work for everybody. We think there is a spectrum of pricing and offerings that we would like to bring to market, and have a portfolio of products that optimises the opportunity – and frankly gives the product that people want and are willing to pay for,” said CFO Mike Herring in April.
“We’re not ready to announce what that pricing’s going to look like now, but it is our intention to have multiple levels over time, and multiple different product offerings.”
Today’s deals suggest that Pandora is on course with its plans to launch its multi-tiered on-demand offering this year in the US before rolling it out globally in 2017.
“We absolutely are committed to and believe we’re optimistic we’ll achieve a timeline where we can launch products by the end of this year,” Herring told analysts in July.
“We are focused on rolling out the new on-demand product in our existing markets first, but absolutely see global as part of our path to 2020 and we’ll be working with the industry on those licensing deals going forward,” added COO Sara Clemens.
Pandora is also continuing to integrate the Ticketfly ticketing operation that it bought last year into its main service. Earlier this month, the company confirmed that it will soon be selling concert tickets from within its main app.
Pandora held a conference call with analysts following the announcement. Here are some of the key comments made by Westergren and Herring during the call.
On Warner Music Group: “We’re having constructive conversations with warner and hope to have them part of this launch. we’re working hard there,” said Westergren. “Obvously our intention and our desire is to launch with them, that’s important. We’re having constructive conversations, and we certainly hope to have it done in time for launch.”
On subscription margins: Herring said that Pandora’s new deals will see it paying between 65% and 70% of its subscription revenues out to rightsholders as royalties. He and Westergren declined to give any details of minimum guarantees and advance payments agreed as part of the deals, however.
On subscription targets: Pandora is actually being clear on its goals for its expansion: It wants to have 100 million monthly active users by 2020, with at least 10% of them paying for a subscription: 10 million subscribers. Note, it already has four million people paying for its ad-free Pandora One tier, so that means adding an additional six million over the next four years.
“We spent 10 years watching our customers use our product. We know where they run into barriers and are looking for additional features and functionality. We know where the value proposition is that will convert people to subscription, and we have those moments in time within the product in order to convert them, where we can demonstrate that value in context, in-product,” said Herring. “A 10% penetration into our long-term target of 100m monthly users, is highly achievable.”
On Pandora’s financial goals: Herring said that Pandora sees its existing internet-radio service becoming a $2.4bn business annually within the next five years. And subscriptions? “We believe we can build a $1.3bn subscription business over five years, based on 10% penetration in the US,” said Herring – referring to getting 10% of Pandora’s US listeners to pay for a subscription. He added that this plus its ticketing business could make Pandora a $4bn-revenue company within five years.
On launch timing and global deals: Herring said that Pandora “will unveil our on-demand product by the end of this year” but made it clear that it will be US-only. “These are US-only deals, though we will continue to operate in Australia and New Zealand,” he said.
But globally: “The deals set the groundwork in order for us to have the right conversations. Key to what we’re setting up here is all the data-sharing, content-ingestion relationship – how we’re going to operate together as a business between the music industry, the label community and Pandora from an on-demand perspective,” he said. “We’re going to bring these products to market in the United States: that sets us up well to expand internationally over time, as we see the opportunity present itself.”
On marketing plans: Pandora will initially focus its marketing efforts for the on-demand tiers on existing listeners, and particularly on the 4m-odd Pandora One subscribers. “We have that payment relationship… our initial push will be to launch these products into that audience, and let the people who know and love and are loyal to the Pandora experience get involved with these products earlier,” said Herring.
“The initial rollout here is really going be focused less on marketing to people who aren’t currently using Pandora, but rather looking internally at our existing Pandora users.” But Westergren added that under the terms of the licensing deals “we’ll have the flexibility we need to do the free trial stuff that you want to get people to try the product”.
On plugging the gap in subscription streaming: “One thing that’s become clear to the industry is that Pandora is really naturally aligned with them, as a business and a mission but also as a business model,” said Westergren.
“The mid tiers will address the mass consumer, which we think has been a missing piece in this industry… The industry: one of their sensitivities is protecting the ARPU [average revenue per user] and Pandora is uniquely able to address this market and not have the bottom drop out: to maintain price and to have a funnel that’s profitable and really to support driving that price up over time, versus being an all-or-nothing proposition.”
On a knock-on effect for other services: “This should set the table for a different set of economics going forward for everyone,” suggested Westergren. When Pandora’s mid-tier offering arrives, it will be interesting to see whether and how soon rivals follow suit.
On Pandora as a friend for the industry: We haven’t seen an interview or conference call where Westergren hasn’t talked about his past as a working musician – it’s one of Pandora’s go-to points of differentiation with rivals (although Dr Dre and Jay Z may have some views on that). He went further in today’s call though.
“We really are keen on solving the industry’s problems and being part of a solution, in our word and deed,” said Westergren, citing Pandora’s existing work around artist marketing and ticketing. “This is a platform that’s been doing more to help working musicians and labels than any other platform in the last couple of years and that’s only going to accelerate.”
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