Pandora is a company that mainly makes its money through advertising deals on its streaming Internet radio service. But a growing portion of the business is also affiliate downloads of songs that users hear on Pandora and want to buy on either iTunes or Amazon’s MP3 service. And the biggest mover accelerating growth in that regard are downloads taking place on the iPhone.
Users are buying about a million songs a month now from these affiliate links on Pandora, CTO Tom Conrad tells me. Of those, a solid 20% are coming directly from Pandora’s iPhone app, which includes an easy link to open the iPhone’s iTunes app, and buy a track. That’s really impressive considering that it’s just one phone that a relatively small percentage of their users use.
But really, I’m not surprised by this at all, because Pandora has always been a brilliant music discovery service. And when paired with the iPhone, you have an all-in-one new music machine. And Pandora was actually the top downloaded app on the iPhone for all of 2008. But last month, when Apple completed removing DRM from all its iTunes tracks, it created an even a greater incentive to buy music that way. Now, I can buy music on the go, sync it back with my computer when I get home, and listen to it anywhere.
Another feature driving affiliate sales is the bulk music purchase option. This allows you to bookmark songs on Pandora, and with one click buy them all on either iTunes or Amazon. 10% of web users who are buying music through Pandora are using this bulk buy feature, Conrad says.
Here’s an interesting way to think about these affiliate sales. If Pandora is selling 1 million tracks a month, that’s $12 million in sales a year (though Apple and Amazon make the majority of that). But Pandora is still only less than 1% of all radio when you take into account the terrestrial and satellite varieties. Say hypothetically that Pandora made up 100% of radio, the potential sales of these affiliate tracks would then by $1.2 billion a year, as Conrad notes.
That of course is very unlikely to ever happen, even in Pandora’s wildest dreams, but still Conrad says that from Pandora’s own research, they know that for every song purchase Pandora drives, users are likely to buy 3 to 5 more songs on top of the one they found. At this 100% model, that would make Pandora a $3.6 to $6 billion a year business.
Why play such a hypothetical? Well because the total recorded music industry revenue last year was only $4.6 billion. Affiliate links can be big business on the web and on mobile.
Even before the iPhone app, Pandora was one of the top affiliate purchase drivers for Amazon and iTunes. And amazingly, their main competition wasn’t other online music sites, but instead was search and shopping engines like shopping.com. Given the boost Pandora is already seeing from the iPhone in this regard in just a matter of months, it seems pretty clear that mobile purchases could be a big deal down the road.
And just imagine if Apple one day lets apps access iTunes right from within the apps to ease the process even more. With in-app purchases coming in iPhone 3.0, something like that could be possible one day.
Love Pandora. Could you ask him why they do not have a similar affiliate program with concert ticket providers? I find a lot of new artists through Pandora and it would be great to see a list of all the artists I have “Liked” that are coming to my area.
If they do have this feature I have not been able to find it.
“Could you ask him why they do not have a similar affiliate program with concert ticket providers?”
Oh, that is a great idea actually. Since Pandora knows your location they can search based on that and show concerts playing in the next 60+ days. It might be a little hard since tickets sometimes sell out quickly.
Maybe a separate panel below that shows all of the concerts based on music you like. This could really be a great add on for Pandora.
imeem should check pandora; we don’t sell the popular everyday stuff available from itunes, mainly b/c it a really tough game; but i’ve met many people who love pandora; just for the radio.
also, it’s big in stores; i know several cafes, store owners who just stream pandora all day.
I am constantly amazed at the number of businesses that are using Pandora. It’s a great way to have music playing in your shop/restaurant without having to spend time flipping through the same music on your ipod…. but it makes me wonder how legal it is.
it’s not legal at all; and if BMI or ASCAP were smart; they’d leap on Pandora’s new money train. (hint hint; take out my competitor); or Pandora should charge an 4-hour streaming streaming fee.
buts’ if you make money off of music/video/etc.. ip.. in anyway, you have to pay, if the author/rights-holder deems it.
organizations like ASCAP/BMI whatever; send young lawyers around listening; taking notes; suing. to claim a general pool for artist to collect from.
it’s out first amendment right to charge for what we say as well as getting to speak it.
umakeitcool.com is made by tamago, a corporation formed by artist to take advantage of this; fuck free, it’s out job, an cheap as sucks.
if you wants the money; make it, sell it. otherwise, don’t bring it.
the music industry is focused on re-selling the past; we want the future.
It’s legal. It’s no different than playing FM radio or CDs or iPod. It *may* be a violation of Pandora’s T&C.
The business owner may be liable for additional royalties to be paid to ASCAP/BMI/SESAC, but there are exemptions for most small businesses that aren’t “places of entertainment”. ascap.com and bmi.com have the details on this on their sites.
Sirius XM offers a “for business” package that bundles the ASCAP/BMI license fees.
the rules are…if you USE (as in store atmosphere) to make money…(also see advertising…) then uos needs to pay.
From BMI’s web site:
http://bmi.com/...08/pdf533679_1/
(Click on “Don’t TV, cable, and radio stations pay to use music?”)
Public performances of radio and TV are specifically addressed in Title 17, Section 110(5) of the U.S. copyright law which states that any establishment, other than a food service or drinking establishment, that is 2000 square feet or larger must secure public performance rights for TVs or radios if the following conditions apply:
For radio, if the establishment is using:
- more than six loudspeakers; or
- more than four loudspeakers in any one room.
There’s actually a way to get concert recommendations from Pandora but for the moment there’s no easy way to get to it. We’ll fix that. Here’s what to do.
Visit http://www.pandora.com and log in
Now visit http://www.pand...ra.com/concerts
Our good friends at SonicLiving will populate a page for you based on the artists you’ve told Pandora you like via station creation and bookmarks. Give it a try.
Very cool. Thanks Tom.
I pretty much discover and buy 90% of my music through Pandora on the iPhone. I wish it was easier to buy from Amazon MP3 on there as that’s the only reason I really sync to my laptop. It’s a lot easier now that you can download right from iTunes on the phone but I still prefer Amazon MP3.
Huh. Who knew you made more money by selling music than giving it away for free? Anyone?
ehh, attractive numbers but lets consider the operating costs of pandora. Manual music filtering/categorization? thats a lot of heads on payroll.
@yayeyay if we’re going to talk about the costs of running Pandora, it’s important to remember that the music analysis costs are a tiny (basically isignificant) drop in the bucket compared to the Internet radio licensing costs.
@Tom I assume your costs are in this descending order: licensing, bandwidth, storage, staff
I strongly disagree with the notion that “Affiliate links can be big business on the web and on mobile.” The percentage you get is very small on a small ticket item. Most iTunes affiliate fees are 5 cents per track sold, or 5% of the album price.
Assuming they’re selling 1 million tracks a month at a dollar each, that’s $50,000 a month or $600,000 a year. I doubt that even pays for their obscenely high music licensing costs.
The real take away from this is that Pandora is selling music for the labels, and that revenue should be taken into account when their music licensing fees are calculated. If Pandora is selling substantial amounts of music, they’re obviously providing promotional value to the record labels.
But there is no way an internet radio station could support itself purely on affiliate fees. The licensing fees paid to SoundExchange alone are too high for that.
Rusty is absolutely right on this. This story isn’t about how much money Pandora can make on selling music (the 5% affiliate fee on $12MM in music sales is only $600,000 which is a tiny, tiny, tiny fraction of both our real revenue and our revenue potential). The real story here is that it’s a huge revenue opportunity for the artists and labels who take 70% of the revenue for music sales. This style of music delivery and discovery can deliver *billions* to artists and labels.
I’m assuming these figures are just for US. Imagine if Pandora was available to the rest of the world…
MG, I love your writing (and like Pandora), but you are insanely off base on this one. Rusty tells it straight. Max they are making $500K/year on iPhone affiliate sales – which is nothing compared to their bandwidth and licensing costs. They would be so much better off with a $.99 app (or a $9.99 one) the real story is how they could screw this up so badly.
For Pandora, the iPhone app has meant they no longer have high customer aquisition costs, but given that they lose tons of money on their iphone-only users, this isn’t a blessing. Last I heard Pandora was buring $10M a year and trying to raise. Maybe TC should report on how those VC meetings are going?
Based on my own internet radio experience, their current licensing costs far outweigh their bandwidth costs.
You (and Rusty) certainly right that there’s no real affiliate money in this for Pandora. This story is about the opportunity the Pandora’s of the world represent to artists and labels. As radio transitions to an IP connected medium, the category can deliver billions of dollars in revenue to artists and labels.
As for Pandora’s business we’re supported through advertising and that’s going exceptionally well for us — both on the web and on the iPhone. Paid iPhone apps convert at somewhere between 1/10 and 1/20th of the free apps. We have nearly 4 million iPhone listeners, at 10% conversion to paid at .99 we’d have made 400K so far on the iPhone. Our advertising efforts on the iPhone alone have brought in dramatically more than 400K. Focusing on getting a few cents for app installation is the wrong model for a service like Pandora. We have ongoing costs (licensing, streaming), so we need ongoing monetization. Advertising is a great solution for that (and the economics do close), but you need scale for advertising to work. You can’t build an advertising business while at the same time limiting your installed base by forcing them to pay 99 cents to get started. 99 cents on the other hand is a fantastic model for lots of application types. It’s just not right for us.
Pandora has never had high customer acquisition costs. iPhone or otherwise.
their licensing costs are much lower than yours, but yes, I agree. I’d estimate licensing costs as their top expense, then staff, then servers, then bandwidth — and each of those is more than iPhone affiliate sales; hence their large losses every year.
Interesting figures, I’m quite surprised. I wonder if Shazam and Last FM are having similar or greater success with their iphone apps.
For those of you that are currently comparing that revenue to costs remember that purchasing music via mobile is still in its infancy and as more people get smart phones on more networks that number is only going to increase.
Pandora may be useful, but only in the few countries that they are willing to serve to. LastFM was a good replacement until they started to charge. I have a nasty feeling the record company moguls are behind that. That is why I ‘copyright-infringe’ their music.
very interesting
Pandora really does seem like a great advancement in the music industry. But I agree with a previous post that it would be nice if they took on the idea to tell people when these artists you “like” will be near you when they do go on tour or for some special event. I also found it quite shocking that just from these users 1 million songs are being downloaded in just a months time, that is insane. But of course music is just great and how could anyone live without it haha. It would be a great idea for Apple to really market itself with Pandora though as they might be able to see a lot more sales because you can download the Pandora app on the app store on the iPhone or iPod Touch. Giving the option to buy a song you hear from Pandora without having to remember the name of the song or artist will be a huge help as well. I do really think this would be a great move in the right direction for music and artists that really want to be known.
@Rusty – great point about successful affiliate partners should have their fees reassessed. There’s only so many successful cases out there so why can’t they benefit from establishing a productive conduit for increased music purchasing?
@text – you make a good point. any real figures on the current makeup of smart-phone holders? I imagine it’s less than 15% total.
@cameron – I doubt Apple will market itself with Pandora. They came out with the Genius feature as essentially their response to Pandora’s ever-expanding fanbase.
@thewordpainter Apple is promoting Pandora right now in Apple stores, in print campaigns (NY Times, USA Today), and (somewhat fleetingly) on TV. Seems they like the way we help them sell more iPhones more than they worry about any perceived competition with their music products.
Tom, great to hear from you & great to hear about that for Pandora’s sake! Considering you guys are one of the top apps, I wouldn’t doubt they want to promote the synergy. You’ve already got the traction, and I guess the genius function doesn’t overlap with Pandora enough to cause a problem. Hope to see Pandora continue to do well!
The Pandora app is definitely one of the premier music devices through the iPhone. It is great to hear they are doing so well with sales, and like the article said soon enough apps will be able to access iTunes to purchase in an even shorter motion.