The Coming Battle – PANDORA VS. SPOTIFY

News that Spotify is about to launch in the U.S. has caused me to examine how this new entrant will impact Internet radio.  There are significant differences in the Pandora and Spotify offering.  Pandora has a giant head start having over 80 million registered users and an average audience of 451,024 AAS Monday-Sunday 6 AM – Midnight (according to Ando Media’s November Webcast Metrics).  If you ask most people whether they would like to choose the music they listen to or have someone play songs based on attributes of music, the overwhelming majority will choose the former.  Whether they actually engage in the behavior of creating a playlist or do not have the time wanting to be more passive and have songs chosen for them remains to be seen.  While I believe both Spotify and Pandora can coexist, Spotify is going to substantially curtail Pandora’s growth.  Pandora touts personalization but Spotify is the ultimate in personalization.  One can argue that Pandora may be better for music discovery but Spotify has a built-in social aspect which allows music to be easily shared among friends.  A Pandora IPO should happen soon or they risk having those upward to the right audience growth charts flatten out..

Where does this leave terrestrial radio.  Unfortunately for those stations in the music arena far behind.  I am still hoping that the terrestrial stations streaming on line will adopt a different approach but the high degree of fragmentation makes this difficult except for perhaps CBS and Clear Channel.  Clear Channel has been quite active promoting iHeart Radio.  Aggregating all of their stations however is not enough to compete with Pandora and Spotify longer term due to their relatively low level of personalization.

Let the games begin….

Internet Radio Revenue – WHERE IS IT?

Having been intimately involved in the Internet radio industry for many years (we were there at its birth), I am amazed that advertising revenue has developed so slowly.  It was 2004 when we formed Net Radio Sales to represent stations in the sale of national Internet radio advertising and this period was also when TargetSpot (another rep firm/network) was formed as well.  I estimate that national Internet radio revenue for 2010 was approximately $25MM.  Using the 80/20 (local to national ad revenue) rule of thumb would mean that total Internet radio revenue is $125 MM.  I question this number as streaming has been more effectively sold when stations are aggregated and thus far radio groups have been slow to figure out how this new medium is sold.  Local stations don’t have the expertise (yes this is beginning to change) but local ad unit rates can often be much higher since in many instances it is sold on a sponsorship model rather than on a CPM basis.  I estimate total non-Pandora internet ad revenue at $75MM based on my knowledge of what most groups are generating.

According to Ando Media’s November ranker, the top 20 Internet radio groups recorded an AAS of 866,481 (note: Monday-Sunday 6 AM- Midnight).  If this represents the head of the tail (as in the long tail theory first expounded on by Chris Anderson), then total audience is approximately double or 1,750,000.  Internet radio has three primary ad units; in-stream audio, video preroll, and display (sometimes synched with audio ad).  Let’s look at the revenue potential of each:

In-Stream audio advertising:

The number of ad units varies greatly depending on whether a station has terrestrial roots (just putting its over the air signal on the stream) or is Internet only.  Terrestrial radio stations that are streaming typically have 12 ad units per hour.  However, services like Pandora may only run 1 unit per hour.  62% of the audience in Ando’s November Ranker was from Internet only stations with Pandora representing the bulk of this number.  As a result we can calculate the following:

Terrestrial Streaming – 1,750,000 total audience x 38% terrestrial streaming x 12 units x 18 hours per day x 7 days per week x 52 weeks x $3.00 CPM/ 1,000 = $156,855,000 in terrestrial streaming revenue.

Internet Only Streaming – 1,750,000 total audience x 62% internet only streaming x 18 hours per day x 3 units per day x 7 days per week x 52 weeks x $3.00 CPM/1,000 = $63,980,280 Internet only streaming revenue

Total Streaming In-stream revenue = $220,835,280

Video Preroll Ad Revenue:

The top 20 groups measured by Ando recorded 323,750,301 sessions for the month of November (Note: Ando’s number only includes sessions of 1 minute or longer).  Again assuming this is half of the total industry audience would result in approximately 650,000,000 potential preroll video impressions (each session creates 1 preroll opportunity) x 12 months x $10.00 CPM would result in total video preroll ad revenue of $78,000,000

Display Ad Revenue:

Many stations have the ability to run a synchronized banner when an ad is playing although not all have this ability.  Some stations also rotate banners on their player which have no relation to an audio ad that is playing.  We could assume a premium in-stream rate for synchronized audio but have chosen to use the rotating banner on the media player as our projection model.

The average station has a 2 hour and 30 minute session duration.  Let’s assume one banner position that rotates every 3 minutes (avg length of a song).  This would create 50 banner impressions per session.  Multiplying the number of sessions (650,000,000) by 50 impressions per session  x 12 months would result in 390 billion display impressions.  Let’s utilize a 30 cent CPM which results in display revenue of $117,000,000

So aggregating all of the ad types we have the following total potential internet ad revenue:




In-stream audio


Video Preroll




Total Potential Ad Revenue


In total, Internet radio advertising has the potential of generating $415,835,280 in revenue.  What is actually being generated is far less.  Some analysts estimate that Pandora will generate $100 million in 2010 revenue.  While Pandora has some subscription models and sells music generating revenue let’s assume 80% or $80,000,000 comes from advertising revenue. This means Pandora represents 19% of total potential Internet radio advertising.  I believe Pandora at this point out bills the rest of their Internet radio competition combined.   Adding my estimate of 2010 Pandora and non-Pandora ad revenue means total revenue $155 Million or a sellout rate of 37% for the industry.  There is still a lot of unsold inventory.  Inventory sellout rates need to be much higher before CPM rates move higher.  It is interesting to note that terrestrial CPM rates are significantly higher at $12.00 (per Inside Radio).  This makes little sense as Internet radio is much more accountable (exact measurement) and has the ability to target ads to a much higher degree.  Why has ad revenue been so slow to grow? – I’ll deal with that in a later post.

Angel Street Capital Invests in Mofuse, Inc.

Angel Street Capital has participated in Mofuse’s recent completion of a Series A preferred stock offering.  Mofuse provides a DIY solution for the creation of mobile websites.  Angel Street Capital believes that Mofuse provides a much needed service.  While much hype has been garnered around mobile applications, the bulk of mobile web interaction occurs in a browser and most websites do not display well on mobile phones.  Not every one needs an app as I wrote in a recent blog.  While there is a great degree of competition in this area we also believe the opportunity is large enough to support many competitors.

The Mofuse management team is led by CEO Annette Tonti and its founder David Berube.  We believe David has an excellent vision regarding the development path of the platform and Annette is a seasoned team leader and energetic new business maven.

Pandora – Increasing Sales Force

Gee do you think Pandora is increasing its ad sales division?  See today’s IAB Smart Brief Classified ad: