By Robert Channick
Chicago Tribune (MCT)
CHICAGO — Fast-growing online music service Pandora has been touted as the future of radio, offering more than 150 million registered users customizable stations built on individual preferences.
The future of Pandora, however, may look a lot more like "WKRP in Cincinnati," where sales managers in plaid sport coats pitch car dealers to buy radio spots. Hoping to turn an incessant tide of red ink, Pandora has added a local sales staff in Chicago and other major markets to go head-to-head with old-school radio stations for advertising dollars.
"We are now one of the biggest radio stations in every market in the U.S.," said Pandora founder Tim Westergren. "We're actually big enough to really think about ourselves as a local radio (station) as well as a national one."
Westergren was in Chicago recently at a party for agencies and clients, part of an eight-city road show aimed at promoting local radio sales at the expense of traditional broadcasters. Breaking down barriers to an entrenched industry and winning over media buyers may be more challenging than reinventing radio, something Pandora is well on its way to accomplishing.
Pandora, which rolled out its free online service seven years ago, dominates the Internet radio space with 70 percent of listenership and nearly 52 million active users. Its audience represents about 6 percent of total U.S. radio listenership, a share that has nearly doubled during the past year.
Fueling its audience growth is the migration of the service from Internet to interstate. More than 70 percent of Pandora's listening hours are now mobile, untethered from computers via smartphone apps and unlimited wireless plans. For a growing number of people, Pandora is the car radio.
"We really have become radio writ large, not just computer radio," Westergren said.
Unable to get much traction in the car with display ads, Pandora has shifted the focus of its advertising-driven model to traditional radio spots, a crucial initiative for the 12-year-old California-based company, which went public in June 2011 and has yet to turn a profit.
Earnings for the first quarter of fiscal 2013 showed total revenue of $80.8 million, a 58 percent year-over-year increase. Advertising revenue for the first quarter was $70.6 million, a 62 percent increase from the same period the year before. The net loss tripled, however, to more than $20 million, with content acquisition _ music licensing and online-only performance royalty fees _ accounting for some 55 percent of expenses.
"Because of the very high music-licensing fees, Pandora pays over 50 percent of its total revenue for music, and unlike the broadcast model its fees go up with actual usage," said Tom Taylor, news editor for Chicago-based trade publication Radio-Info.com. "So its only path to the kind of growth that will satisfy Wall Street is selling advertising."
Listeners get about three stand-alone commercials per hour and are able to skip 12 songs per day. A small percentage of subscribers have upgraded to a premium service for $3 per month that eliminates ads and allows for unlimited song skipping, but nearly 87 percent of revenue comes from advertising, both Web display ads and, increasingly, radio commercials that can target demographics and geographies, down to the ZIP code.
Helping market Pandora as a local radio station are new data from Triton Digital, the leading provider of online-listening ratings for both traditional and digital-only broadcasters. Last month, Triton Digital added average quarter-hour, or AQH, ratings to its monthly reports, employing the standard metric used by Arbitron to measure and monetize audience for terrestrial radio stations. Pandora had a 1.0 rating, equivalent to a double-digit AQH share, in Chicago among adults 18-34, reaching more than a quarter of that population. Results were equally strong in New York, Los Angeles and other top radio markets.
"As time went by, we got increasing pressure from the demand side, from advertisers and agencies, to adopt the traditional metric of average quarter-hour," said Mike Agovino, co-founder and chief operating officer of Triton Digital.
An Arbitron spokeswoman questioned the validity of linking distinct methodologies, but the move no doubt creates an apples-to-apples comparison, opening the door a little wider for Pandora, Slacker and other digital stations to compete for radio advertising dollars.
"We've utilized it in both ways, from the audio side and from the mobile display side," said Meri Vassek, senior media director for Michael Walters Advertising in Chicago. "But the money for Pandora is absolutely coming out of the radio budget."
Terrestrial broadcasters are facing encroachment from all sides, with satellite radio reaching more than 22 million paying subscribers. With that spaceship sailed, the industry is slowly mobilizing to defend its remaining turf against the streaming upstarts. While local radio revenue was flat in 2011, online revenue for traditional stations increased 15.1 percent, to $439 million, according to BIA/Kelsey.
Leading the charge was Texas-based Clear Channel, the nation's largest radio operator, whose digital platform iHeartRadio helped make it a distant second to Pandora among the top 20 U.S. Internet radio services, according to Triton.
For many stations, however, the high costs of streaming have muted the promotion of online versions of their programming.
Hubbard Radio, which owns three stations in Chicago, streams all three stations and provides mobile apps but sees little return to date.
"Our core business is still terrestrial radio," said Drew Horowitz, executive vice president and COO of Hubbard Radio. "It still is the primary revenue driver for all of us."
Horowitz, who has been part of Chicago broadcasting for 36 years, found it "dichotomous" that a new technology company was basing its revenue model on terrestrial radio. He said Pandora's spot sales efforts have yet to significantly impact the market.
"It's always tough to break into the media circus," Horowitz said. "Dollars are tight, people are skeptical, and it's a challenging environment to be building a new business right now. We're all fighting for the same dollars."
George Karzas, owner of Gale Street Inn, a 50-year-old Chicago restaurant and longtime radio advertiser, is sold on Pandora. Karzas launched a three-month, $7,500 campaign in May and has seen a spike in both Web traffic and new, mostly younger customers.
"I do like it. I think streaming is big," said Karzas, who writes and voices his own spots. "Radio has been good to the Gale Street Inn. I've had a unique voice, and over the years I've had good feedback on our radio stuff, and I think this is just kind of the next level. "
Three dozen employees occupy Pandora's regional sales office in Chicago, a modern, open space filled with whiteboard walls, amorphous desk islands and amenities on the 21st floor of the Tribune Tower. Started five years ago as a two-person operation selling national advertising, the expanding office moved up from a smaller space on the ninth floor in February, coinciding with the hiring of the first two local sales reps for Chicago.
Other locally harvested clients include Northbrook Toyota, Luna Carpet, Olivet Nazarene University and the Chicago Cubs.
"They're on the streets; they're doing cold-calling," said Heidi Siena, director of sales for the Chicago office. "They're really trying to capture the local radio dollars that are spent in this market, so they're trying to get their fair share."
For Westergren, the vision that has transformed radio listening has come down to hawking a car dealer in Schaumburg, Ill.
"We've got to be growing and putting feet on the street," Westergren said. "Getting local to work is the ballgame for us."
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