Pandora Plans to Move Beyond Music

By Markets Fool.com

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IMAGE SOURCE: PANDORA MEDIA.

Pandora Media (NYSE: P) turned the Music Genome Project into a service that has more than 77 million listeners and generates nearly $1.2 billion in annual revenue. In the process, the company's name has become nearly synonymous with music streaming.

But Pandora is now eyeing a different future -- one that delivers its listeners more than music. As CEO Tim Westergren put it, it would be a "go-to destination" for audio.

The company already has added some comedy content and podcasts, such as This American Life and Serial, which the company says have attracted some 10 million listeners. Investors should expect to see more non-music content being streamed across Pandora's channels.

Moving beyond music makes sense for the company for a number of reasons. It allows Pandora to appeal to more listeners and, just as important, more advertisers. It helps develop a broader and deeper well of content that it can make available to eventual subscribers of the on-demand service it has planned. And it opens up the opportunity for Pandora to develop a more attractive cost structure over time.

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Listeners want more

Pandora estimates that half of its 77 million users already listen to non-music audio content. And right now, they're looking elsewhere for it.

Here's Westergren on the opportunity he sees:

Research confirms that listeners would like to hear more nonmusic content but are currently frustrated by discovery. Pandora's ability to surface relevant content to a scaled and engaged audience uniquely positions us to solve this problem. Additionally, listeners had confirmed that content offered by Pandora is viewed as more legitimate than unknown sources, increasing both their appetite and willingness to engage with new genres on the platform.

More listeners spending more time on the free, ad-supported service opens up more spots for advertisements. And Westergren says brands that advertise around non-music content are "perceived favorably, highlighting strong monetization prospects."

But that's not the only reason this makes sense

Moving beyond music may also help attract subscribers to the on-demand service Pandora expects to launch in the coming months.

There's clearly a large audience for the right kind of non-music audio programming.

AM/FM stations that focus on news, talk, and information make up the second largest format in terrestrial radio today, trailing only country music, according to the most recent Pew Research Center statistics.

We don't need to look any further than Sirius XM (NASDAQ: SIRI) -- which could find itself merging with Pandora if Liberty Media ups its reported offer for the streamer -- to see how moving beyond music can drive subscription success.

Sirius XM, whose channel lineups a decade ago were dominated by music, now has nearly as many non-music channels than it has dedicated to music. And that's not counting channels that are dedicated to live team sports broadcasts.

The satellite service grew paying subscribers by 50% over the past five years and continues to add about 8% per year. It attributes that growth in part to the variety of content it now offers.

Keeping listeners tuned in

Pandora has found that its users tune into comedy programming and podcasts at different times than they listen to music. That indicates that people who already had been using the service for music are probably now spending even more time listening.

That exposes those listeners to more ads, which helps to drive revenue on the free service, and primes those users for an on-demand service that would probably eventually offer a wider variety of non-music content.

This may be more profitable than music

What executives didn't discuss are the costs of building out this non-music content. But it should compare favorably with music in terms of the cost structure.

Music royalties cost Pandora 54% of its total revenue over the first six months of 2016. At that rate, Pandora says it can turn a profit on its ad-based business.

But that number could rise to 70% or more for an on-demand music service, if Spotify's reported cost structure is an indicator. And because streaming royalties are based on consumption, those costs won't improve with scale.

Simply put, it's tough to reliably turn profits on streamed music with those kinds of costs baked into the cake.

With non-music programming, however, Pandora will be able to hammer out its own contracts with content providers -- or create its own content, a la Netflix or Amazon.com on the video side. And as it increases listener hours -- or subscribers -- those costs don't increase along with it.

That could help to drive down the company's content acquisition costs as it scales out its subscription service.

It may seem like a departure from what Pandora does best, but expanding its content offerings beyond music makes sense for the streamer for a number of important reasons.

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John-Erik Koslosky has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, Netflix, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.