Pandora's Next Frontier: Your Wheels

Ask any teenager the coolest place to listen to music online, and you'll likely be told Pandora. The service has 65 million registered users who tune in for customized streams of, say, artists similar to Lady Gaga or a selection of rockabilly or rap, interrupted by just a handful of ads per hour. Until now, though, Pandora has had trouble reaching people in their cars, where most Americans do the bulk of their radio listening.

So Pandora Media, based in Oakland, Calif., is working with auto and electronics manufacturers to make it easier for users to get the online music service while driving. And Pandora has started approaching advertisers that buy time on broadcast radio, pitching the service's ability to reach targeted groups of consumers on their daily commutes. "Any company that wants to be a big radio player needs to have a solution for the car," Pandora founder Tim Westergren told Bloomberg Television on Oct. 12. "We're just beginning that now."

By early next year, Ford Motor (F) will be shipping Fiesta compacts with software that operates Pandora via voice controls. Later in 2011, drivers of several other Ford models will be able to skip a song on Pandora with a voice command or choose a new stream by simply saying an artist's name. Mercedes-Benz is offering Pandora controls on the steering wheels of some of its models, and Pioneer Electronics has started selling car stereos that can operate Pandora. Anyone wanting to listen to the service behind the wheel, though, still needs a smartphone or other device with a mobile Internet connection.

Pandora says it can help marketers reach listeners based on age, gender, ZIP Code, and musical taste, letting them deliver more relevant ads than what's possible on regular radio. That's because Pandora users provide such details when they register for the service. "It's very intimate," says Scott Kelly, digital marketing manager at Ford, which also advertises on Pandora and has hired singers John Legend and Jewel to promote the service. "It really lets us hone in on the message."

Founded in 2000, the privately held company burned through cash for much of the last decade and was almost forced out of business by rising music royalty fees. Its popularity on smartphones—Pandora is one of the top apps for both Apple's (AAPL) iPhone and handsets running Google's (GOOG) Android—helped the company turn a profit for the first time in the fourth quarter of last year. Revenue more than doubled in 2009, to $50 million, and could hit $125 million this year, predicts Internet analyst Steven Carpenter, who published an extensive report about Pandora in June on technology news website TechCrunch.

The company still has challenges. Pandora has little money for marketing because it pays between 60 percent and 70 percent of its revenue to artists. Ad sales for Internet radio are still dwarfed by traditional broadcasting; online services will get just 3.3 percent of the $17 billion in U.S. radio ad spending this year, according to researcher SNL Kagan. And Pandora faces growing competition from the likes of CBS' (CBS) and startups such as Spotify, Mog, and Rdio.

With more than half the Internet radio market, though, Pandora is attracting big brands. Hallmark and for-profit education company DeVry Educational Development have campaigns on Pandora. Grocer Whole Foods Market (WFMI) ran an audio ad in the San Francisco area, aimed at women aged 24 to 34, accompanied by an on-screen ad for a lunch special. MillerCoors uses Pandora to target listeners it knows are at least 21 years old, says Kim Luegers, who manages a campaign for the brewer at Chicago ad agency Draftfcb. "There are huge opportunities" for Pandora, says David Sze, a venture capitalist who led a $35 million investment in Pandora last year. "And auto is definitely one of those."

The bottom line: After building a strong lead in Web radio, Pandora is hoping to get more listeners to tune in while driving.

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