Updated: 4 reasons Pandora could win the fight for digital music

Updated. After nearly 11 years as a “startup,” personalized radio provider Pandora finally went public last week, raising over $230 million and debuting with a valuation of over $3 billion. It may be a labor of love, but with its focus on radio, Pandora has a better chance for mass adoption than some of the other new digital music services. Yes, I’m talking about those from Apple, Amazon, Google, Turntable and the will-it-ever-launch-in-the-U.S. Spotify. Pandora delivers a better radio experience while most of the others are aiming at a mythical “jukebox in the sky” that many users won’t need. Plus, other digital music services are trying to change, rather than enhance, well-established music listening and buying behavior.

True believers in digital music dwell on that vision of the jukebox in the sky capable of delivering any song to any device on demand, usually powered by a subscription “rental” business model. Rhapsody and Best Buy’s Napster have come closest to delivering that model in the U.S., but neither has ever been able to attract over a million subscribers at a $10 to $15 per month price. Spotify is building the same thing in Europe, with an ad-supported freemium twist to incite trial.

Chances are that Google’s and Amazon’s cloud-based music lockers — which today only give a user streaming access to his own uploaded collection — have plans to expand into the on-demand space. Apple appears more conservative. Today Apple is a digital retailer with a brand-new service for synchronizing local, rather than cloud, music storage.

On-demand streaming at the price that current royalties require faces a limited market opportunity in the U.S. I’d estimate it is five to seven million subscribers. Here’s the reasoning behind that seemingly conservative number. Pandora quotes convincing data that shows 80 percent of music-listening time is spent with radio rather than one’s own collection, and most of that listening is done in the car. I did surveys at Jupiter Research that showed that music is a relatively passive background activity for most people, and that their tastes aren’t very eclectic. Most people listen to the same genres and artists they listened to in high school or college.

Likewise, although everybody listens to music, nearly half of Americans don’t buy any, and of the remainder, 25 percent account for 75 percent of the spending. A relatively small number of heavy buyers spend $200 a year, while all the other spenders buy the equivalent of a CD or two. Even a $5 per month service is historically more than most people will spend on their own music. Yet satellite radio provider SiriusXM has over 20 million subscribers paying $13 to $17 per month.

So here’s why Pandora may catch on faster and ultimately gain more customers than some of the other contenders:

  • It’s catering to the masses. Most people listen to a programmed mix of artists organized by genre (i.e., radio). Pandora has genre channels as well as personalized channels that are even more tuned to a user’s favorites.
  • It has a radio business model, with premium upside potential. While Pandora has a $12 $36 per month subscription service, 85 percent of its revenues come from its free, ad-supported product.
  • It doesn’t depend on people shifting from ownership to rental. Users can still buy all the music they want to own from iTunes or Amazon. The “on-demand access to everything” pitch from Spotify or Rhapsody is geared to making people shift their yearly music spending to monthly rental. And it’s still more expensive.
  • It doesn’t need to integrate everything. Though it seems appealing to bundle music discovery, passive and on-demand listening, and collection management, that hasn’t proven to be a killer combo for Rhapsody.

Pandora’s product and business model are aligned with existing consumer behavior, and they are adapting to mobility well. Pandora itself doesn’t have to work as hard as companies trying to justify the jukebox in the sky, and it doesn’t require as much effort from its audience as some of the new social music experiences. Pandora is taking the easy path in digital music.

Question of the week

Which digital music service will gain the most traction?