Feb. 13 (Bloomberg) -- Slacker Inc. has spent the past six years as an also-ran in the digital-music business, where even the leaders have struggled to make money.
The San Diego-based company says that’s about to change, with a revamped mobile application, website and a $5.5 million advertising campaign attacking rivals Pandora Media Inc. and Spotify Ltd. In preparation, the startup has more than doubled its staff to 90 in the past eight months.
“It’s an opportunity for us to throw a punch when nobody’s looking,” said Chief Marketing Officer Craig Rechenmacher, who joined from Electronic Arts Inc. in July and opened the company’s marketing office in Palo Alto, California.
For consumers, Slacker presents another choice in a crowded field. The company is touting a music service with 10 times the number of songs as Pandora, as well as content from Walt Disney Co.’s ESPN and ABC networks. In a market where Pandora gets close to 90 percent of its sales from ads, Slacker focuses on paid subscriptions, which account for two-thirds of revenue.
Chief Executive Officer Jim Cady said Slacker invested heavily in consumer research to see what it would take to get people to switch from competing offerings, and what they would be willing to pay. The company sells a monthly $3.99 ad-free service that includes unlimited song-skipping, and a $9.99 package that makes any song or album offered by Slacker available on demand. Cady said more than 500,000 of Slacker’s 4 million active users are paying subscribers.
“It’s really an ad business that is helping a subscription business, but not dominating the subscription business,” Cady said.
Slacker’s new mobile app and website are designed to make it easier for members to discover music and use premium features. The company has to overcome its past setbacks, including a failed foray into the hardware business, followed by an unsuccessful effort to compete with Pandora in the ad-supported market. Slacker has raised $50 million in venture funding since 2010 to build its digital business, the company said.
For the ad campaign, Slacker is spending $2 million upfront and $3.5 million the rest of the year. In a commercial, a character complains about Pandora’s smaller music library, and a display ad criticizes Spotify for its propensity to post annoying updates to a user’s Facebook Inc. account. The ads will show up on sites including Google Inc.’s YouTube, Vox Media Inc.’s SBNation and Spin Music Group’s Buzznet.
Winning won’t be easy. Pandora boasts more than 65 million unique monthly members, and Spotify has more than 20 million, compared with Slacker’s 4 million. Meanwhile, there’s a whole crop of other digital-music and radio offerings from companies like Rdio Inc., Rhapsody International Inc. and TuneIn Inc. And they all face the looming threat of Apple Inc. The iPhone maker has been in talks with labels about a Web-radio service, people with knowledge of the negotiations told Bloomberg in October.
Marija Jaroslavskaja, an analyst at IHS iSuppli in Santa Clara, California, estimates that revenue in the market for digital-music subscriptions will more than triple by 2016 to $986.9 million from $319.2 million last year.
“It’s a matter of getting users,” Jaroslavskaja said. Slacker’s “business model distinguishes them from the rest of the players in the U.S. market, but in terms of the consumer proposition, that’s more difficult,” she said.
On the cost side, the biggest difference between Slacker and Pandora is how they pay royalties. Slacker has direct relationships with all of the major record labels and more than 1,000 independents, while Pandora has a licensing deal with SoundExchange, a trade group that collects royalties and distributes them to artists and publishers.
For Slacker, each deal includes an upfront licensing fee and then a revenue share. The company has struck similar deals with ABC, ESPN, the Weather Channel and American Public Media.
Slacker keeps about 50 percent of the revenue it generates, a number that should go up as the service attracts users, Cady said. Pandora paid royalties amounting to 60 percent of its revenue in the first 10 months of 2012. The Oakland-based company is pushing lawmakers to pass a bill that would lower royalty requirements for online radio services to levels paid by satellite and cable-radio services.
Pandora’s stated path to profitability comes from mobile ads, where revenue growth has finally caught up to consumers’ transition to smartphones from desktops. Mobile revenue more than doubled in the fiscal third quarter to $73.9 million, compared with the 85 percent increase in the number of hours consumers used the mobile service.
Dominic Paschel, a spokesman for Pandora, declined to comment on specific competitors. He reiterated the company’s goal of reaching a 20 percent operating margin as revenue growth continues, regardless of the royalty rate. Pandora’s third-quarter margin was 1.8 percent. The company said its market share for all U.S. radio reached 8 percent in January from 5.6 percent a year earlier.
Slacker’s revenue has doubled each of the past three years and should do so again in 2013, bringing the company to profitability, Cady said.
Luring users to its ESPN offering is one way he plans to get there. Slacker brings live national and regional feeds from the sports network as well as snippets of various popular shows. Paid subscribers can personalize their stations to prioritize updates from their hometown teams. In March, ESPN will roll out a Slacker station featuring Scott Van Pelt and Ryen Russillo, hosts of the SVP & Russillo show.
“We’re constantly looking at the marketplace and trying to find folks that allow us to achieve our goal,” said Patrick Polking, a senior director of distribution and business development at ESPN’s audio division. “Our mission is to serve sports fans anywhere and everywhere.”
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