Pandora Killed The Radio Biz?
[Note: originally docuemented in December 2009. All data references are from mid- to end of 2009.]
“Video Killed The Radio Star” by The Buggles ushered in a new era as the first music video ever broadcast on MTV in 1981. MTV revolutionized how audiences discovered music, successful artists were created, and record companies marketed their songs. Today, the confluences of digital music, declining advertising revenues and rapid adoption of mobile devices are challenging the traditional radio business model. I thought it would be useful to quickly research the state of play in the "radio business." A real easy way was to compare at a high level what a large commercial radio station (I picked WHTZ “Z100” based in the NY metro area) versus an Internet radio service (I picked Pandora) offer to artists, record labels and consumers. I think this will help us can begin to appreciate the radical transformation taking place in how people discover and listen to music.
Z100 is a flagship station of Clear Channel Communications, the largest owner of radio stations in the US. Z100 is the top Pop Contemporary Hit Radio (“CHR”) station in the New York metro area, reaching approximately 3 million people daily. Pandora was launched in 2005 as a monetization mechanism for the Music Genome Project, a database associating 400 musical attributes to artists and songs. Pandora offers “stations that play only the music you like,” with 40 million registered users and 3 million daily listeners (in late 2009). Pandora is the most popular Internet radio station today with a market share of 40% (as of summer 2009). Internet radio delivers music through web and mobile applications, ideal for its customized experience. Commercial radio broadcasts through the airwaves, allowing ubiquitous access to a large audience. Most major stations also simulcast via the web and mobile apps.
Z100’s content is determined by music charting services (like Billboard), which have an elaborate system reviewing airplay and music sales to determine popularity weekly. Pandora builds DJ-less custom radio stations around an artist or song chosen by the listener. A playlist is then created based on songs with similar attributes from their database. In 2007 Pandora played over 90% of its catalogue each day, and Pandora now hosts 700,000 songs (2009 data). Pandora represents the long tail of music, in stark contrast to the 120-song rotation for Z100.
For artists, airplay on CHR has historically provided the greatest exposure to large audiences, and getting plays signaled that the artist has “made it.” However, Billboard today ranks medium rotation on Z100 as only the twentieth best promotional method (the highest radio ranking), reflecting the multitude of media outlets for artist promotion today. Pandora’s algorithmic playlist gives far more artists limited airtime. Digital services like Pandora pay royalties to performing artists, not just the composers, as in commercial radio.
For labels, commercial radio continues to be the most effective way for their music to quickly reach broad audiences. Despite a steady decline, commercial radio still reaches 91% of the US population. Beyond airplay, other promotional opportunities (in-studio performances, interviews etc.) exist on Z100 that Pandora cannot offer. Internet radio’s significantly narrower 17% penetration rate highlights commercial radio’s continued importance in reaching listeners. Internet radio stations pay licensing fees to labels to access their catalogue. For labels, songs aired on commercial radio are a cost, while Internet radio represents a revenue stream.
For consumers, music anywhere at anytime was a promise only the airwaves could provide since broadcast radio began in the 1920s. In return for this ubiquitous access, listeners are limited to selecting the genre, with stations determining advertising and programming unilaterally. Pandora gives listeners more granular choice (i.e. artist or song), and allows control over their customized broadcast’s timing. Pandora’s mobile application has increased their reach, with 10 million users now registered via the iPhone. A more personalized experience and broader access are the primary reasons for Pandora’s accelerating popularity.
Both Z100 and Pandora are free for listeners, and advertising revenues dominate in supporting programming and operating costs. Clear Channel’s radio revenues were over $700 million for their third quarter in 2009, down 17% from the previous year. By contrast, Pandora will reach $40 million in revenues this year. So, why should commercial radio be concerned about such a small upstart?
As shown below, advertising revenues are dramatically shifting from traditional media to the Internet as brands rethink their strategy toward targeted marketing. Pandora’s large audience and selectable demographics represent an attractive alternative to commercial radio’s mass marketing approach. Citadel Broadcasting, the third largest radio station owner, has recently declared bankruptcy due to revenue declines and leverage. Clear Channel currently has $20 billion in debt, which many view as detrimental given advertising revenue trends.
As wireless dashboards get introduced, Internet radio is entering the last stronghold of commercial radio’s ubiquity, the automobile, where 35% of radio listening takes place.Pandora will be built into Ford’s Sync system, possibly available in 2011. Commercial radio will no longer be the sole medium for ubiquitous music access.
Pandora is far from perfect. Its advertising dependent business model has yet to prove scalable, given its royalty and licensing fee structure. True ubiquity is still a promise, not reality. Pandora does not give listeners full control over what gets played. Subscription based digital music services, such as Rhapsody, MOG and Spotify provide listeners with more music, greater content control, and have similar discovery features to Pandora. When these streaming services become widely available via mobile and in cars, a compelling alternative to Pandora and commercial radio will emerge. Google’s rumored attempt to bundle Spotify into its Nexus One phone and foot the music licensing costs clearly indicates how powerful the combination of ubiquity and music choice is.
Podcasting represents another competitor to format based radio. A truly personalized listening experience can be created from a myriad of content (music, news, weather, sports, special events, etc.) readily available today. One company, RadioWeave, recently launched an application that delivers this array of content. A customizable platform that offers user selected podcasts integrated with music streaming would compete effectively with radio.
Clearly, commercial radio will be forced to evolve given the pressures in its existing business model and as better choices emerge for listeners. This new personalized radio experience, like many disruptive innovations, will be adopted quickly. Recently, radio business consultant Mark Ramsey warned radio executives: “you are not in the ‘Radio Business’ anymore.” It feels like the perfect time to pen the song “Pandora Killed The Radio Biz.” Maybe The Buggles are still around?