How would you like a radio station where every song was right up your alley? If so, you should check out Pandora. I interviewed Pandora founder, Tim Westergren who described Pandora as "personalized radio." He said, "We have 22 million registered users and 45,000 people use it in a day. We have doubled every year. We have done no advertising. The growth has mostly been from word of mouth, due to a combination of factors: People really like the service, it is easy to share, and they can get a friend hooked. Pandora satisfies an unmet need to get radio that plays what you like."
Pandora doesn't just sound good to listeners, it also appeals to advertisers. According to Westergren, "99% of Pandora's revenues come from advertising. It is graphic advertising -- an image on a screen. The ads are 10 to 15 seconds. They are banners and larger canvases -- rich interactive valences that occupy half the screen and surround it. Clients include Toyota Motor Corp. (NYSE: TM), Nuvo Ring, consumer electronics companies like Microsoft Corp. (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL), and movie producers who display trailers. We get healthy Cost Per Thousand (CPMs) [advertising rates] for visual advertising that is like a magazine spread targeted at specific genders, Zip codes, ages, and music."
It looks like Pandora's future could be in mobile advertising. As Westergren explained, "We see our market as the advertising business. There are three segments that have very different growth potentials: Interactive advertising is growing at 15% a year; mobile advertising is growing at 50% a year and is in the tens of billions of dollars; and radio advertising is hurting the most. Those advertisers are looking for a better place to advertise. Mobile advertising (getting the platform on the iPhone) is a more attractive place for those radio advertisers. That's because the advertising product's interactivity level is higher."
It sounds like an interesting company to me. Do you use Pandora? Do you like it?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
