When it comes to the battle for your attention, online music providers are making waves – sound waves that is.
According to research organization IFPI, the global music industry generated $15 billion in revenue in 2013. Of that, 39% came from rapidly growing digital channels. In order to reach a larger audience, record labels and artists are turning toward online and streaming sources in increasing numbers. Per IFPI, the number of people who have subscribed to an online music downloading service increased 40% in 2013 to 40 million people, and is up fivefold from just 8 million subscribers in 2010.
By comparison, physical format sales declined from 60% of global sales in 2011 to just 51% of global sales in 2012. Based on the rapid growth of online subscriptions and streaming it could be just a matter of time before we see a role reversal and online music revenue generation surpasses physical format sales.
This is one reason why we've witnessed such a huge surge in online music providers popping up over the past couple of years. Of course, not every online music content provider is going to be a success, but weeding out the potential winners from losers isn't always easy. Thankfully, we have Brand Keys and their proprietary Customer Loyalty Engagement Index to do the hard work for us.
Utilizing measurements gauged to assess customer loyalty toward online music providers, Brand Keys assessed and ranked 15 of them from top to bottom. Today, we'll take a closer look at which brand consumers are most likely to stay loyal to over the next year (as Brand Keys puts out this study once a year).
Why brand loyalty matters
But, before diving right into which company took the top honors, perhaps a quick word on why brand loyalty matters.
As you might imagine, having dozens of digital download and online music websites to choose from can make it difficult for one particular company to stand out. This is why it's so important for online music providers to get the best bang for their advertising dollars when marketing to consumers. By strategically focusing on digital music enthusiasts, online music providers have the potential to build an emotional connection between the brand and the consumer, which, in turn, can lead to a paid subscription and focused advertising, the ultimate goal for online music companies.
Furthermore, word of mouth advertising of family and friends can be invaluable for signing up younger adults who have grown up using the World Wide Web, and who are more easily influenced by the opinions of their peers. It's imperative, therefore, that online music providers put their best face forward, per se, to bring in new customers and retain existing listeners.
The online music brand consumers are most loyal to is...
Now to answer our initial question: Which online music provider are customers most loyal to?
Would you care to venture a guess before reading any further?
Although many would likely guess Apple because of the company's cult-like brand following and widespread adoption of iTunes, it only took second place in Brand Keys' rankings. Instead, for those of you who selected Pandora (NYSE:P), you've correctly guessed the online music service that consumers stick with the most. With loyalty tough to come by in this space, that could mean that Pandora's future growth prospects are bright.
Before we dive into the specifics of why consumers prefer Pandora, I believe it's worth mentioning that Google's Play service came in third, Spotify fifth, the revamped MySpace was in a tie for sixth, while Napster, Rhapsody, and Soundcloud found themselves in the bottom tier.
Why Pandora tops the list
First and foremost, I'd suggest the reason Pandora drives loyalty better than any other online music service is because of the level of personalization offered through its Music Genome Project and listening platform.
The Music Genome Project allows trained music analysts to listen to songs and manually categorize up to 450 different characteristics, or "genomes" for each song. Note, the key point there is that trained people with degrees and experience are handling the categorizing of music, and not a computer. This is an ongoing project that sees roughly 25 music analysts at Pandora analyzing a cumulative 10,000 songs a month. Currently, there are more than 1 million tracks in Pandora's media library. The advantage of this system is that once you create a station based on a band you like, the platform can deliver songs with a similar sounds and expose listeners to new music they are likely to enjoy. For artists, it's potentially the perfect way to have their music exposed to the right audience.
In addition to its music suggestion strength, Pandora's platform allows for an incredible degree of specialization. Specifically, Pandora encourages consumers to interact with the platform, thumbing-up or thumbing-down songs, or perhaps skipping a song altogether, to help better understand customers' music preferences. In other words, consumers are able to provide Pandora's media player with instant and actionable feedback to improve their unique music experience.
Another important factor that separates Pandora from the crowd is that its subscription service, Pandora One, is cheap compared to a lot of subscription services. Even with the recent price hike to $4.99 a month for new members, the service (existing and loyal subscribers will stay at $3.99/month until their annual subscription is up), which removes ads from the media platform and allows users to skip more songs per day, is still about half the price of some of its peers on a monthly basis. Low prices are often an attractive way to retain customers.
This brings me to the last point of why Pandora is so successful at retaining customers: it's not pressuring customers into purchasing songs. Pandora, while sporting roughly 3.3 million subscribers in May, derived only 19% of its total second-quarter revenue from subscriptions. The rest of Pandora's revenue came from advertising, which it also customizes and gears toward specific audiences through its Brand Station Platform.
Put simply, Pandora's focused on its listeners and not necessarily on its subscription model despite its recent success (subscription sales grew 35% year-over-year). This strategy appears to resonating with its listeners.
Staying on top won't be easy
Of course, investors that believe high brand loyalty may translate into juicy profits may not want to be so quick on the "buy" trigger in their portfolio.
Keep in mind that the online music field is very crowded, and there are quite a few providers, like Apple and Google, who have considerably deeper pockets than Pandora. Music royalty rates are also very unpredictable and could threaten Pandora's margins. Finally, as Foolish consumer and technology stock specialist Rick Munarriz pointed out last month, Pandora's popularity in terms of listening hours and total listeners may be nearing a peak.
These are all factors that current and prospective investors in Pandora will want to keep in mind.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool owns shares of, and recommends Apple, Google (A shares), Google (C shares), and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.