The Spectacular Existential Crisis of Pandora
Music’s most innovative business was about to implode. This time last year, Pandora was in dire straits. The company had gone from being the music industry’s gilded pioneer — exciting everyone from teens to retirees with the newfangled idea of Internet radio at the turn of the century — to a lagging joke, edged out by the rise of on-demand streaming services. While AM/FM radio was still going strong, online radio couldn’t stack up to Spotify and Apple Music, and a series of expensive missteps sent Pandora’s stock tumbling precipitously low. It lost an executive. Then another, and another. “The music may be over for Pandora,” one headline read. Another, more to-the-point: “Pandora is in a death spiral.”
By the time Roger Lynch took over as the company’s fourth CEO in four years, the chances of rising from the ashes were slim. “Everyone wants to feel like they’re on a winning team, and employees really loved the company but felt like it was losing,” Lynch tells Rolling Stone now, almost exactly one year after he took charge of the slipping business. But Pandora has actually weathered that year well — and, to the surprise of many, even came out a bit stronger at the other end. Headlines lit up the company once more last month, but with a very different sheen: Satellite radio giant SiriusXM announced its intent to buy Pandora in a $3.5 billion all-stock deal, which will soon create the biggest audio entertainment company in the world. Under new parents and an aggressively remixed business model, Pandora is determined to be relevant again — if, that is, music fans are willing to take it back.
Naming the company after the world’s most foreboding tale wasn’t the original idea. In Greek mythology, Pandora is a woman who receives many blessed gifts from the gods, including the gift of music, the company’s founding team explained on its website. But the name’s much more odious, cautionary association — Pandora’s box, a source of immense, cursed trouble — crept up when the company’s power began to fade in the last decade, as its customers defected to streaming services.
While the Music Genome Project (as Pandora’s user-created custom radio station platform was originally called) led a revolution in the way people listened to music and won the hearts of listeners who loved the easy background way of discovering new songs as they hosted dinner parties or drove cars, it was hard to sustain financially. In 2007, a federal panel tweaked copyright rules so that the Web-based radio operator suddenly had to pay double its royalty rates, while terrestrial radio scraped by without having to incur those fees and satellite radio got away with a lighter rate. Pandora’s tough money situation would only worsen over the years, and Tim Westergren, Pandora’s own founder, even admitted to the Washington Post in 2008 that the company was “approaching a pull-the-plug kind of decision” and that it felt like “a last stand for webcasting.”
It limped on. But then came Spotify & company, which lured millions of users away each year with a simple tease: Why would you sit and wait for individual songs to be played when you could get all of them at a single tap, whenever you wanted, without limits? Pandora had a chance to beat out the new predators in its territory — it could’ve quickly added similar interactive functions and rolled out social features like playlists, analysts today say — but it didn’t believe on-demand streaming would eclipse the radio-style discovery format. In 2015, panicking, Pandora tried to catch up by spending $75 million on streaming service Rdio and unveiling Pandora Premium, a subscription service meant to rival Spotify. But it was too late. The freeloaders using its ad-supported tier weren’t convinced, and neither were investors. Westergren stepped down in 2017 after 17 years leading the company, leaving behind some grim words: “I believe Pandora is perfectly poised for its next chapter.”
Pandora’s own founder admitted in 2008 that the company was “approaching a pull-the-plug kind of decision”
Roger Lynch does not try to disguise how dark the depths were for Pandora when he was tapped as its new CEO last autumn. He joined the company two weeks before the end of its third quarter — in which it presented one of its most dismal performances ever.
“Morale hit a low right after that earnings call,” Lynch remembers. “I had to do a call and explain that the company completely missed its own revised lower guidances for the prior quarter.” But today, he says, “It feels like a completely different place, to be honest. We survey our employees every four months and I hear over and over that they feel like it’s a different place. There’s still a lot we have to do, but they feel like we’re listening and taking action, which results in tangible business changes that we measure in our revenue and subscribers.”
Indeed, Pandora in 2018 has seen something of a surprise growth spurt, closing its positive second quarter in July as it reshuffled its entire operation, drilled down on media partnerships and laid out an aggressive new advertising technology strategy. Lynch — whose career has swerved from aerospace to investment banking to the founding of three internet companies (the last one the video-streaming company Sling TV) — had the feeling that Pandora’s strength lay in its huge advertising capabilities and immense trove of data; after spending his first two weeks at the company in a “boot camp” meeting with every department, he refocused the team around ad-tech and marketing goals. (Lynch is also a musician himself; he plays guitar, alongside three other CEOs, in a band called The Merger.) His vision for Pandora’s future is straightforward: Recognize where you’re beat. Play to strengths.
If Spotify has cornered the on-demand streaming market, there are plenty of other markets still to be won. “We think there’s a big opportunity in what we call internally the ‘new era of audio,'” Lynch says. “Think of all these devices like smart speakers growing in popularity and the growth of new audio formats like podcasting. You have to broaden content beyond just music.” To that end, Pandora is readying the launch of a Podcast Genome Project by the close of 2018. “If you think about what Pandora did for music — it really revolutionized it,” Lynch says. “Previously, you might’ve looked at charts or asked friends what to listen to. Pandora’s Music Genome Project understood the music better than anyone had ever done, at a deeper level. That’s completely lacking in podcasts, unfortunately.”
“There’s a big opportunity in what we call the ‘new era of audio.’ There are hundreds of millions of people who listen to terrestrial radio in this country … Those listeners will not all end up going to subscription streaming.” — Pandora CEO Roger Lynch
Lynch believes fans of spoken word content — a still-nascent crowd, but growing quickly — will be the next frontier. “It goes back to our strategy of really going after listeners who today listen to terrestrial radio,” he explains. “There are hundreds of millions of people who listen to terrestrial radio a week in this country, generating $15 billion of ad revenue. Those listeners will not all end up going to subscription streaming.”
Why would they go to Pandora instead? “It’s easy to stay on FM radio. But if the Podcast Genome Project offers an easier experience, creating the equivalent of a playlist for your morning commute with business headlines already programmed, already in your car, and you don’t have to tell it what to do — that’s how we offer an even easier experience,” Lynch says. “We also realized that for our listeners, the Pandora brand means something about discovery. If we just said ‘here’s a list of podcasts, have at it!’ that would break the brand trust we have with our listeners. We believe our listeners expect something more from Pandora about how you discover what you want to listen to.”
Pandora has another hidden strength in the diversity of its demographic. While Spotify and Apple Music are filled with younger fans on the coasts of the U.S., Pandora’s audience makeup “fluctuates by about a percentage point” state-by-state, meaning that it represents a broader swath of the American population. “Hip-hop is the most popular genre on streaming by far, but areas where Pandora has significant competitive advantages are genres like country music and Latin music,” Lynch says. “Spotify has more listeners in hip-hop, but we would crush them in country. They just announced [the playlist] Hot Country passed 5 million listeners. Well, our country playlist has 63 million listeners.”
It’s numbers like that that make Lynch confident that Pandora is “pretty well-positioned, as people start to migrate over from radio”: Because genres like Latin music and country are wildly more popular on the radio than on streaming services, AM/FM radio fans will likely choose Pandora over Spotify when (assuming that it is a when, not an if) they go digital.
The question is how to get people there. SiriusXM’s takeover of Pandora may have a ready-made answer.
“Spotify has more listeners in hip-hop, but we would crush them in country.” — Lynch
If Pandora missed out on the battle for music’s evolution, it absolutely refuses to lose the war. Neither Lynch nor SiriusXM’s CEO Jim Meyer have given much public detail about the satellite radio company’s takeover of the Internet radio provider — and Lynch declined to comment on the matter to Rolling Stone due to the pending nature of the deal, which is due to close in January 2019 — but the acquisition has perked up the ears of Wall Street analysts, many of whom see a natural hand-in-glove fit for the two companies. There are “significant opportunities to create value for both companies’ stockholders,” Meyer hinted, albeit vaguely, in a press release. SiriusXM also reportedly tried and failed to acquire Pandora last year, so the finance world has been anticipating it for some time.
“Pandora makes sense for Sirius because [Sirius] needs to jumpstart its mobile offering, which to date is non-existent,” Gene Munster, a tech analyst and partner at venture capital firm Loup Ventures, tells Rolling Stone. Meanwhile, Pandora’s 71 million subscribers can “be fed Sirius original content, which gives Pandora new life,” he explains. So SiriusXM — with 36 million North American subscribers who mostly listen to the product in their cars and have very little overlap with Pandora’s users — gets Pandora’s twice-as-large audience, their credit card information, demographics and other data; Pandora benefits by folding itself into the radio ecosystem and acting as an easy slide for SiriusXM users who want to pay less or want to stop using Sirius at the end of their free trial. (A Sirius subscription is $10 to $20 a month.) Last week, Sirius predicted in Q3 financials that it will have over $7 billion in combined revenue in 2018 — making it truly the world’s largest audio entertainment company.
But all of that is hypothetical at best right now. Because Pandora and Sirius are different animals in the eyes of copyright legislation — Pandora’s royalty rate is about 50 percent, while Sirius’ is a much lower 15 percent, which is what has helped allow the latter business to be flush with enough cash for the purchase in the first place — it’s unlikely that the two companies will ever be able to combine into a single platform. Pandora, for the foreseeable future after the acquisition, will operate as it always has. If the Podcast Genome Project flops, or draws only lukewarm attention, the company may sink even lower in listeners’ eyes than it was before, and there’s no telling whether it’d be able to make its way back up after two big missteps.
Lynch is bullish on the idea of Pandora being an audio-entertainment company rather than a digital radio company or even a music company. “There’s a huge opportunity globally in digital audio,” he says. “The changes that are happening in the ecosystem, as well as in listener behavior — they’re going to create decades of growth in the overall industry of digital audio. Pandora is really well-positioned to benefit.” While Pandora is working on its new audio offerings, it is also going to be bringing in money from its reworked advertising technology business, which supports global publishers but won’t necessarily be seen by consumers, he says.
Analysts and industry executives are in agreement that Sirius’s purchase at least buffs up Pandora’s stability for the moment; in the event that Sirius grows even bigger down the line, perhaps with the acquisition of Live Nation that BTIG Research analyst Brandon Ross sees as an increasing possibility, Pandora could be set up with an even rosier future that marks a total turnaround from where it was in the summer of 2017.
Tech companies, after all, bounce back from the brink all the time: Just look at Apple, which has been left for dead too many times to count in its 42-year-history and just became the U.S.’s first publicly-traded company with more than a $1 trillion valuation in August. On the other hand, there are companies like AOL, which have fallen into total irrelevance despite a number of valiant attempts at resurgence. And the digital music market is getting awfully crowded, as the biggest streaming services snatch up more music fans every day.
Pandora’s holistic audio entertainment strategy “is the right strategy, because Spotify and Apple Music are not touching that segment,” Munster says. “Sirius adds unique content to those podcasts and has an experienced ad sales force to optimize the content to a mobile users for the first time.” But, Munster adds, by far the biggest challenge that lies ahead for Pandora is branding — specifically, “letting people know that today’s Pandora is better than yesterday’s.” It’s a much trickier task than it sounds.