Pandora Media Inc., the top Internet radio company, is luring advertisers such as Hallmark Cards Inc. and MillerCoors LLC to its streaming service and gearing up to chase the lucrative drive-time market.
By early next year, Ford Motor Co. will be shipping Fiesta cars with software that operates Pandora via voice controls. Daimler AG’s Mercedes-Benz is promoting the radio service in vehicles, and Pioneer Electronics sells car stereos that include Pandora.
Pandora needs a foothold in cars to challenge traditional radio and attract more advertisers, which pay a premium to reach listeners during commute hours, according to the Radio Advertising Bureau. The advantage of Pandora is marketers can target users based on age, gender, home ZIP code and musical taste, letting them deliver more relevant ads than what’s possible on regular radio, said Scott Kelly, digital marketing manager at Ford, which is also advertising on Pandora.
“It’s very intimate,” Kelly said in an interview from Ford’s headquarters in Dearborn, Michigan. “Because Pandora knows so much about the user and who they are, where they’re listening and what artists they like, it really lets us hone in on that message.”
Pandora, based in Oakland, California, aims to get a bigger chunk of the more than $17.1 billion radio-ad market. For now, advertisers mostly reach its 65 million listeners via personal computers and smartphones. Pandora is one of the most popular applications on both Apple Inc.’s iPhone and Google Inc.’s Android devices.
Founded in 2000, the closely held company burned through cash for much of the past decade and was almost forced out of business by rising music-royalty fees. Its popularity on smartphones helped Pandora turn a profit for the first time in the fourth quarter of last year, founder Tim Westergren said in an interview in January. Revenue more than doubled last year to $50 million.
This year, sales may reach $125 million, assuming the company attains 100 million registered users, according to Internet entrepreneur Steven Carpenter, who published a report in June with the San Francisco-based TechCrunch blog.
The company still faces challenges. Between 60 percent and 70 percent of Pandora’s revenue is paid to the nonprofit music industry group SoundExchange to compensate for the songs it plays. And Pandora only serves listeners three ads an hour. That leaves the company with little money to do its own marketing, Carpenter said.
“It’s about getting as broad distribution as possible wherever traditional radio was,” said Carpenter, the founder of Cake Financial, which E*Trade Financial Corp. bought in January. “They’re displacing traditional radio with a more personalized version of it.”
Revenue for Internet radio remains dwarfed by traditional broadcasting. Of the $17.1 billion in ad sales that radio will attract this year, online services will account for 3.3 percent, or $552 million, according to SNL Kagan, part of the Charlottesville, Virginia-based research firm SNL Financial. And as more music goes online, Pandora will be competing with CBS Corp.’s Last.fm, as well as startups like Slacker Inc., Spotify Ltd., Mog Inc. and Rdio Inc.
Commuting hours are especially valuable to advertisers, said Jeff Haley, chief executive officer of the Radio Advertising Bureau, the sales and marketing arm of the radio industry. The group’s membership includes 6,000 stations.
“Drive time commands roughly a 20 to 30 percent price premium depending on the market,” Haley said. He expects commuting hours to maintain higher rates as more radio shifts online.
DeVry, Whole Foods
For now, Pandora controls more than half the Internet radio market and is attracting brands such as Hallmark and DeVry Inc., a for-profit education company. They’re running campaigns on Pandora that rely on audio messages, ads on computer screens and mobile commercials. Whole Foods Market Inc., the largest U.S. natural-goods grocer, ran an audio ad in the San Francisco area, targeted at women age 24 to 34, accompanied by an on-screen phone ad for a lunch special.
“We’re starting to see the majority of our campaigns be multiplatform,” said Pandora Chief Revenue Officer John Trimble, who oversees the company’s ad efforts from New York.
MillerCoors, a joint venture of SABMiller Plc and Molson Coors Brewing Co., uses Pandora to target listeners that it knows are at least 21 years old, the legal drinking age, said Kim Luegers, who manages the campaign at Draftfcb, an ad agency in Chicago.
Away From Home
A bigger presence in the car gives Pandora’s advertisers a way to reach commuters on the way to and home from work. On weekdays from 5 a.m. to 10 a.m., 58 percent of radio listeners are away from home, according to Arbitron Inc. From 3 p.m. to 7 p.m., that number increases to 70 percent.
Pandora introduced its first mobile app on the iPhone in 2008, enabling the service to work with Ford’s Sync music and information system. With Ford’s new AppLink program, which will be in several cars next year in addition to the Fiesta, drivers can say an artist’s name and instantly go to that Pandora station without having to fiddle with buttons. Ford, the second-biggest U.S. automaker, also has hired musicians Jewel and John Legend as pitchmen to promote its own products on Pandora.
David Sze, a venture capitalist at Greylock Partners in Menlo Park, California, predicted that radio listening was headed to the Internet when he led a $35 million investment in Pandora last year. While the economy was slumping and most investors were staying away from advertising companies, Sze saw a business that was gathering millions of users and changing the way music is delivered.
“There’s no question that music and audio is a fundamental aspect of our entertainment and media consumption and all those are going to the Web,” said Sze, who also invested in social-networking sites Facebook Inc. and LinkedIn Corp. “There’s a huge opportunity there.”