It has been a pretty good couple of weeks for Pandora. The internet streamer showed up at the top of Ando Media’s latest Internet radio ranker. Then a study came out raising questions regarding Pandora listener fatigue, and the service's fans (or perhaps hopeful vendors) rushed to their defense declaring:
I worry about studies like this, because they tempt the broadcaster to lean back and say "look, see--Pandora's a fad." Nothing could be further from the truth, as Clear Channel, CBS and other webcasters can attest, since Pandora is cleaning their clocks right now online.
Soon after the ratings were released, a number of companies used this year’s Consumer Electronics Show (CES) to announce deals to offer Pandora enabled mobile entertainment systems.
This is how the Wall Street Journal reported the news:
Pandora Inc. has struck a deal with electronics maker Pioneer Corp. that promises to make it easier for drivers to listen to its personalized radio service in cars-bringing Internet radio one step closer to snagging a built-in spot on dashboards. The development represents a direct challenge to broadcasters of satellite and traditional radio, who have long dreaded the arrival of Internet radio in cars.
Back in November we noted that venture capitalists Crosslink Capital, Labrador Venture Partners, Selby Venture Partners and WaldenVC had thus far poured $56.3 million into the company. They must have been very pleased with all the coverage.
The deals Pandora cut with Ford, Pioneer, and Alpine might seem major breakthroughs for a company touted as the future of radio, one that is “cleaning the clocks of Clear Channel and CBS.” You might be tempted to agree with the Wall Street Journal that with Pandora on the dashboard, radio’s dominance in the car is over, but hold on a minute.
Take a look at this press release from 1998:
XM Satellite Radio today announced agreements with leading radio manufacturers bringing satellite radio a giant step closer to American consumers....Hugh Panero, President and CEO of XM, announced that the company has signed agreements with Alpine Electronics, Pioneer Electronics, and Sharp Corporation to manufacture and distribute XM-capable radios and audio systems.
We know how that turned out. The company merged with Sirius, needed Liberty Satellite to bail it out, is losing subscribers, and the stock sells for less than 70 cents.
But in the short term the announcement gave the new company a PR boost, temporarily helped the stock price, and made Pioneer and Alpine a few bucks. Did it have any lasting impact on the success of XM and its impact on radio? No.
Today’s deals signed with Ford, Pioneer, and Alpine will ultimately have less impact on Pandora than the XM deals had. But it may help the company’s backers get their money back.
To understand why Pandora, Slacker, and the other pure Internet radio companies seem to attract so much attention, one has to go back to the Internet bubble of the late 1990s when venture capitalists threw money at any half baked idea having to do with the Internet. A good place to start is John Cassidy’s dot.con. Subtitled How America lost its mind and money in the internet era, The book explains:
Depending on which Wall Street or Silicon Valley guru you listened to, the Internet was the most revolutionary development since the electric dynomo, the printing press, or the wheel. The most striking manifestation of this thinking was the extrodinary prices that people were willing to pay to invest in Internet companies.
The dot-com bubble burst for most types of businesses, but not for media. There is still the belief among many that while the Internet may not have transformed groceries (think Webvan) or pet food (think Pets.com), it will still transform media. Given what has happened to newspapers, that might seem reasonable. However, the fate of one medium like newspaper does not necessarily mean that radio will follow in it's path.
That’s why money continues to pour into Internet radio in staggering amounts, $56 Million into Pandora, $70 Million into Slacker, $30 Million to Imeem, and $16 Million to Goom . That’s just the players that are still playing. Add the investments in music services and already failed companies like Spirilfrog and we’re talking about some real money.
Venture capitalists are not patient people. They want to see a healthy return on their investment, and they want to see it fast. The key to making money is an IPO, Initial Public Offering. The investors issue themselves a bunch of stock, the company goes public, and the insiders sell their stock.
Unfortunately, this recession has hurt the IPO business. Not the same confidence in new companies that one found during the Internet bubble. On top of that, Imeem just sold for a million in cash, pennies on the dollar, raising questions about what a pure Internet radio company is worth.
To protect their investment, the only option for a venture capital company is to keep pumping money into their company, subsidizing manufacturers to create specialized products and paying public relation companies to keep the company in the spotlight. All the while hoping that the public's appetite for high flying IPOs returns.
The irony of this past week's events is that while Pandora got the headlines at CES this week, the real hero was Apple’s iPhone. The new products work only through an iPhone. Unless you have an iPhone in the car, the interface with Pandora is worthless.
The penetration of Apple's iPhone is less than 5% and has probably peaked. The real buzz at CES was about all the iPhone competitors that are coming to market.
In our November post we explained why we thought Pandora would fail. This month’s good news for the company hasn’t changed our view.