Last week, Spotify announced that it now has 75 million total listeners on its platform. The music streaming service is now available in about 60 countries and sports nearly as many users as pure Internet radio company Pandora (NYSE:P). At the end of the first quarter, Pandora reported that it had 79.2 million listeners.
With the rapid growth of Spotify, it's only a matter of months before the Swedish company overtakes Pandora as the most popular music streaming service in the world. The comparison isn't perfect, considering Pandora operates in only three countries, but it shows management's inability to adapt to a changing market. Competitors are growing and expanding faster, attracting more paid subscribers, and Pandora continues to lose money 15 years into its existence.
Similar to Pandora, Spotify offers free ad-supported streaming to anyone who signs up. On top of passive radio listening, Spotify also lets users listen to any song on demand, entire albums, and curated playlists from other users. It's also expanded to about 60 countries since it was founded in 2006. Essentially, Spotify offers much more value in more countries than Pandora, which has led to an explosion in new listeners.
But what really separates Spotify from Pandora is its ability to convert free listeners into paid subscribers. Of those 75 million listeners streaming through Spotify every month, 20 million pay as much as $10 per month. Comparatively, Pandora has just 3.8 million subscribers paying $5 per month to get rid of its ads.
The discrepancy comes from the way listeners use each product. Pandora is background noise for most people, whereas Spotify is a full-fledged music source. Pandora had a huge audience that it could have sold on-demand streaming to if it had looked at the bigger picture of what's going on in the market. Instead, it kept the pedal to the metal trying to increase ad sales for its radio service.
When Apple (NASDAQ:AAPL) entered the Internet radio market with iTunes Radio in 2013, it didn't rely on advertising to monetize the service. It promoted iTunes downloads and used it as a selling point for its hardware.
As a pure-play radio streaming service, Pandora's primary strategy is to increase ad prices, but the value of its ad inventory is hindered by how people use it. If only a small percentage of people are paying attention to an ad, it doesn't matter how good the targeting is. That's why the minuscule number of subscribers make up nearly one-fourth of the company's total revenue but account for less than 5% of total users.
The rise of Apple Music
With the launch of Apple Music, Apple will have a streaming music presence in 100 countries by the beginning of next month. That will make it one of the most widespread music streaming services in the world. Comparatively, iTunes Radio is available only in the United States and Australia.
Pandora's international expansion has been slow to non-existent. It expanded to Australia and New Zealand in 2012 but has failed to negotiate contracts with the necessary collecting societies in other countries.
The longer Pandora takes to launch in more international countries, the harder it will be to attract an audience as competitors move into those markets. That's one reason Spotify's rapid growth and the launch of Apple Music around the world should concern Pandora investors.
The failure of Pandora's management to adapt is evident in its user growth over the past few years. When Spotify expanded to the United States in the middle of 2011, Pandora had 37 million listeners. Two years later, active user growth remained strong, reaching 71.2 million listeners. But in the past two years, user growth has slowed to a crawl, adding just 8 million net new users since the middle of 2013.
Comparatively, Spotify's expansion to the U.S. marked the beginning of exponential growth at the company. It's growing faster now than it ever has in the past, adding another 15 million listeners and 5 million subscribers in the first half of this year alone.
Slowing user growth makes Pandora less attractive to advertisers, especially in light of growing platforms such as Spotify. The failure of Pandora's management to adapt to market forces may ensure that it's never quite able to turn a profit as content costs rise annually and advertising demand becomes spread out among the competitors.