Spotify: Storming The Gate

Image Courtesy of "Battle Of The Dark Legion" Castle AgeLate last week sources close to Swedish based Spotify (the digital on-demand music collection which is available on desk tops and mobile applications in Austria, Belgium, Denmark, Finland, France, Germany, Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom and in the U.S.) announced that it intends to compete directly with the current internet radio King in the U.S. (Pandora) by developing a similar "Radio" style music offering. Spotify has already negotiated and currently has in place, direct licenses with the largest music labels in the world including Universal Music Group, EMI, Sony Music and Warner Music along with many other smaller labels. These deals afford Spotify's users the unlimited ability to choose individual songs by individual artists and play them instantly on demand. Spotify users have the choice of: Commercial free music on-demand for $9.99/mo. on mobile devices, $4.99/mo. on desk tops or a free version funded by advertisements.

Spotify (in its current form) allows its users to access millions upon millions of songs, which if listened to individually and in real-time succession would reportedly take over 80 years to complete. (Finally we now have the perfect challenge for all the malignant narcissists in our lives with their vociferous musical snobbery: "So you say you are the biggest music fan in the world? Prove it! Stifle your pie-hole and put these headphones on... I'll get back to you in 80 years... Windbag!) Spotify is continuing to add new songs at the rate of 10,000 per day or (if you will) an additional 21 days of constant music listening added daily. Spotify still has some notable hold-outs, namely The Beatles, Adele and most significantly for me AC/DC. The beauty of developing a radio style offering remains the simple fact that specific artist and label permissions are not required as the non-interactivity of radio falls under a statutory licence. This license allows Spotify to access music (including the music of the current hold-outs) and to a royalty structure similar to Pandora's which is presently negotiated and established by the Copyright Royalty Board. 

In recent weeks, Spotify's mobile app has passed Pandora, SiriusXM and IHeartRadio's mobile offerings in the iTunes App Store. I have been using the Pandora mobile app ever since the day I purchased the iPhone 3G in the summer of 2008. At the time, as I first began exploring all that the iPhone had to offer (natively), I would also visit the App store and search for third party music apps and discovered that Pandora was there in the #1 position on the "free" music-app section, and since it was free, I (along with millions of others) figured "what do I have to lose?" So I downloaded it and fired it up and was impressed with its simplicity and a bit concerned about "what its release would mean for my beloved SiriusXM." As of today, it hasn't meant very much, that is beyond influencing SiriusXM and many others to begin copying the personalized recommendation radio concept. The Pandora mobile app is very stable and it remains an easy and fun way to listen to the music that I enjoy, but more significantly, it has reintroduced me to similar sounding music that I haven't heard in many years and to cool new music that I have never heard before.

I check in weekly to the list of free music apps in the iPhone App store and occasionally Pandora's app will be temporarily unseated by the latest free music app, but Pandora has consistently reclaimed its top position within a few days. Even the SiriusXM mobile app briefly challenged Pandora when it was released one year later in the summer of 2009, but it too quickly sank into oblivion as subscribers swiftly realized that it left many meaningful SiriusXM offerings out of the mix and most notably Howard Stern, not to mention it was frustratingly unstable and it remained so for many years, that is until a recent series of updates which have suddenly been issued and are now measurably improving the mobile experience. While the app is still not perfect, SiriusXM is now showing signs of attentiveness and competency after many agonizing years of disrespectful arrogance and prideful negligence and are finally demonstrating that they are either willingly or forcibly responding to the voluminous pile of negative subscriber feedback by now moving in the right direction with their mobile offering.

So what does this all mean? If you are a music fan, there has never been a better time to be alive as music listening is improving and is being tailored on a constant basis to satisfy all listening preferences. For investors in SiriusXM, Pandora and Clear Channel, the competition to become the top worldwide one-stop shop for audio entertainment remains vigorous and is moving along at a healthy clip. It is becoming obvious to me that specializing in one style of audio entertainment presentation will no longer be a sustainable business plan. 5 years from now the ultimate victor in audio entertainment will be whichever business is quick enough and has enough funding to develop the technology and global licensing to offer everything to its users:

• Curated (Non-Interactive) music genre channels.
• Personalized music recommendation channels.
• On-Demand listening of all available music.
• International availability.
• Total user control (play, pause, fast-forward, rewind, skipping and offline music caching).
• Alternative access (Satellite, Radio Tower, Internet, Mobile and Integration on connected in-home technologies and appliances).
• Music alternatives (News, Sports, Talk, Comedy, Weather, Traffic).
• Choice of Paid Subscription packages and Free Ad-supported listening.
• Lyrics and other Liner note information.
• Integrated targeted Ticketing for Live performances and digital music purchasing.
• Vehicle "in-dash" integration.
• The highest quality audio.

And they're off! It is becoming a horse race where the odds-on American favorites like SiriusXM (who is visibly holding back on the reins) and Pandora (who has been mercilessly whipping its horse into a flat out gallop straight out of the gate) and Clear Channel (who appears to be stuck in the gate by choosing to run with a 300 pound jockey) can now only win by both flawlessly executing and by hoping the other horses stumble in the final 1/4 mile. The Swedish-bred dark horse Spotify looks to be positioning its black stallion to pass the field on the inside rail. Keep your eye on this one ladies and gentleman it will be riveting as it seems none of these horses are wearing blinders (although they all claim to be).

Pandora Shmandora! (The folly of targeting customers who refuse to pay)

In Greek mythology, Pandora's curiosity released many bad things into the world when she opened the box, most of which were so frightening she quickly closed the box trapping only "hope" inside. I am not aware of the full extent of the evil released that day, (after all, it is literally Greek to me) but I assume amongst them, there would possibly be the personification of the miser. Webster defines the word miser as: "a mean grasping person; especially one who is extremely stingy with money." Interestingly it is the Latin root of the word miserable. 

Also of ancient Greek origin is the name Seirios or Sirius meaning "glowing" or "scorcher," commonly known as the dog star, or the dog of Orion, recognized as the brightest star in the night sky, located in the constellation Canis Major. It's appearance in the pre-dawn sky in conjunction with the sun marks the "dog days" of summer. As for the Greek myth of "XM" it can only be defined as beyond AM and beyond FM.

In the ongoing debate of Pandora vs. Sirius XM, the following examples should illustrate how Sirius Xm is the winner, was the winner before the debate began, and will continue winning for the foreseeable future.

First, Sirius Xm chose to create and provide a service to deliver music, comedy, news, sports, talk, traffic, weather, health and religion, unrestricted in its range, unlimited in its usage, uncensored in it's content, and in some cases exclusive in it's offerings, made available from coast to coast to a willing, loyal customer base who in return for this unrivaled service agrees to pay a fee on a monthly, yearly or lifetime basis. In other words, a business model designed to make a profit, and though it may have taken many years to ultimately achieve, the plan has become sustainable and today continues to grow in size, popularity and profitability. Admittedly, it is initially given away for free on a trial basis, but with the self confidence and knowledge that to be exposed to the service is to love it.

When the free trial eventually ends, it is up to the individual to decide if it is worth paying for, thereby eliminating the undesirable business killing miser. Roughly 50% find it worth paying for. In 2008 Arbitron released a study of satellite radio listeners. The study found that 56% of satellite radio listeners were college educated compared to 24% of the AM/FM audience. 24% of Satellite radio listeners had incomes of at least $150,000 compared to 9% of the AM/FM audience. Satellite radio listeners are 61% more likely to listen to an advertisement than their AM/FM counterparts. Sirius recently surpassed 20,000,000 subscribers in December 2010. As for profitability, I will let the release of the 4th quarter 2010 earnings on February 15th speak for itself, this Tuesday.

Pandora who has yet to become profitable, chose instead to provide internet radio with personalized music stations for “free” with limited skipping of undesired songs. Predictably, as with most free things Pandora was (and is) extremely popular with young people who have no money to spend (at least not on internet radio music).

In the beginning, this initially free source of music enabled the service to spread quickly, not unlike the wild west days of the illegal but popular Napster music "sharing" service and the commercial free YouTube years. The "cool factor" was extremely high, unless of course you were the author of the protected copy written material being stolen or exploited. With the implementation of the mandatory royalty agreement enacted to compensate the artists, the "cool factor" has itself now cooled.

The new rules caused a transformation of this "free for all" version into a new "less free" version, with limited song skipping and a 40 hour maximum monthly usage restriction, made possible by the visible and audible advertising interruptions that account for 86% of its revenue, and the totally un-cool, unrestricted, no-ad, premium "Pandora One" version available for $3/month, offered to a customer base that is mostly (and unabashedly) unwilling to pay for the music they provide. In fact to call them customers at all is inaccurate. Webster defines the word "customer" as: "one that purchases a commodity or service". Patron isn't a very accurate description either; let's describe them in the most accurate yet pejorative way possible-- "Users". Today, Pandora boasts 80,000,000 registered users. That sounds incredible! Doesn't it? ( Editor's note: The latest reports indicate that 30,000,000 "users" actually "use" the service, although the actual number of users does not seem to appear in the IPO filing with the S.E.C. )

Now let's explore the rarely discussed, but widely used "work around" for circumventing the limitations of the skip provision, of this "less free" version that most of Pandora's "30,000,000" users prefer. You may want to sit down for this. Once the service has reached it's maximum allowable music skips or 40 hour monthly limit, kids simply log off the expired account, and log on under a new account using a different name and e-mail address. Never underestimate a miser's resourcefulness and ability to improvise when faced with an impending expenditure!

As many of you know, I am fond of reading the comments under online articles and blogs. They are very revealing, entertaining and most informative. We will call this next part the "from the mouths of babes" section. All excerpts below are quoted from the Pandora website blog archive from July 7 2008 shortly after the royalty agreement was reached. I have omitted the names to protect the not so innocent, however the actual unedited text remains online in the Pandora blog archives for your perusal. The following quotes are the genuine, illustrative thoughts, statements and threats of the truly undesirable, unapologetic and unknowingly hilarious "consumer" Pandora imposed upon itself by offering music for free in the first place.

For your consideration and cherry picked for your education and amusement. I quote:

"I am sure you are aware that as soon as people start getting charged to listen, they will just move onto another site."

"The $.99 fee shouldn't be a burden to anyone, and I look forward to ordering Pandora One when finances permit"

"Great news. I'll ask the hard question, though: Will Pandora be toning down the recent explosion of adverts?"

"I'd seriously like to recommend is a sleep timer function in the iphone app. As it stands a LOT of money is being wasted on the bandwith for those of us that fall asleep to pandora."

"I just got an email about this. I listen to Pandora all day so I'm sure it would only take me 3-4 days to hit the 40hour mark."

"I'm always hesitant to pay for online radio because I never know if I'll stick with the service long term. However, 0.99 isn't too bad so I may just end up paying. We'll see."

"I don't really want or need any of the things in Pandora One, but paying $5.94 for six months of music or something would interest me."

"I hate you and I hope you die-- bye pandora, last.fm, here i come!"

"While I don't listen enough during the school year to justify $36 (I know, I know... but I'm a college student - $36 is more than I pay for my electric bill each month)"

"I am very hesitant to pay for music online (don't buy music offline either) since I am in college and really can't afford much. This I can and happily will pay a buck a month for."

"Perhaps if you had some form of automated checking system, though (ex. Amazon.com) it would allow people like me to pay =O."

"now I'll have to stop having Pandora on all day every day xD"

"1) having to pay for the radio is just ridiculous 2) considering the big changes brought in by the internet, this measure looks to me totally anachronistic, if not another reason for illegal downloads"

"I'd like to see a counter that shows how many hours you have left in a given month."

"I just wish the annoying audio advertisements would stop...they're absolutely horrible!!!"

"We hate the idea of limiting anyone's listening, but we have no choice but to react the economic realities of the new rates"

"I hope you choke on those words."

"does listening count towards the 40 hours if I have it on pause?"

"I'm already in for the premium membership - which in my opinion is worth every single cent of the $3/month it costs me!!"

Finally, Pandora recently announced it's desire for an IPO. With the questionable loyalty of Pandora's users and it's yet to be proven sustainability, this stock will be the new #1 target of the same shorts that nearly brought Sirius to it's knees, and to this I say good luck Pandora. I suggest using part of the reported $100,000,000 generated from the IPO to purchase a really good pry bar or perhaps the jaws of life to get at that box and the "hope" still trapped within.