TIM WESTERGREN. SOURCE: FLICKR/TECHCRUNCH
As the field of music streaming options continues to expand, pioneer Pandora Media (P) is "100 percent committed" to growth. That's the phrasing the company used when it announced founder Tim Westergren would take over for Brian McAndrews as CEO effective immediately.
Wall Street pummeled the stock, as the change in captains indicates that Pandora is not interested in selling itself despite reports from The New York Times that it's looking for a buyer. Instead, Pandora is interested in growing, something it's been hard pressed to do. Can Mr. Westergren turn things around?
A music marketplace
Pandora is clearly interested in expanding beyond sit-back streaming radio. Last year, it purchased TicketFly, an online concert marketplace, as well as the assets of Rdio, a bankrupt on-demand streaming service. Westergren envisions combining all of these under one roof into a "music marketplace."
"We are pursuing a once-in-a-generation opportunity to create a massive, vibrant music marketplace," he said in the company's press release.
The integration of TicketFly with Pandora has been a success. The ticketing service's operations have grown rapidly since its October acquisition, as venues and promoters are able to use Pandora to target an artist's biggest listeners when they're coming to town. Rdio's assets, on the other hand, have yet to show any benefit.
While Rdio gives Pandora the technology infrastructure to stream music on demand, it still needs to negotiate the rights with record labels. Pandora has thus far avoided negotiating directly with record labels, relying on standardized performance royalty rates for online radio streaming set by the Copyright Royalty Board. On-demand streaming or expanding its streaming beyond the US, Australia, and New Zealand will likely require successful negotiations with record labels, something Westergren's predecessor was unable to achieve.
Fighting back against the competition
Listener growth has been hard to come by for Pandora over the last couple years. Active listeners fell by 400,000 in 2015, and total listener hours grew just 5% for the year. On-demand streaming services like Spotify, Apple (AAPL 1.27%) Music, Tidal, and more all cut into Pandora's business. And the number occupying the space continues to expand. SoundCloud recently announced it's entering the on-demand streaming business as well.
Pandora has already fallen behind Spotify, which claims 30 million paid members and more than 75 million total users (likely closer to 100 million). Apple Music has 11 million paid subscribers, and Tidal has 3 million just one year after Jay-Z purchased and relaunched the service. Pandora ended 2015 with just 3.9 million subscribers for its ad-free radio service.
While Pandora has some valuable assets with its existing user base, listener data, and Rdio technology, it's still a difficult road ahead for Pandora to expand into on-demand. Additionally, the move will likely be expensive, as record labels require upfront payments to license songs for on-demand streaming and Pandora has little infrastructure and no ad sales teams outside the U.S. and Australia. The language of Pandora's CEO announcement indicates that it's going to move forward with the plan anyway.
Profits have alluded Pandora for years as it spends heavily on ad sales and rising copyright royalties cut into its potential profits. The commitment to growth may be the only way forward for Pandora, but it's not clear that commitment will pay off. That's likely why McAndrews believed selling the company was in its best interest. The problem is, there's no clear buyer for Pandora. The big tech companies that may have been interested in Pandora have already gone out and built their own streaming services. Without a buyer, Mr. Westergren may be Pandora's best option as CEO, but the outlook for the company still isn't great.
