Investor FAQs

Business Metrics

  • Listener Hours: We track listener hours because it is a key indicator of the growth of our business. We calculate listener hours based on the total bytes served for each track that is requested and served from our servers, as measured by our internal analytics systems, whether or not a listener listens to the entire track. For non-music content such as podcasts, episodes are divided into approximately track-length parts, which are treated as tracks under this definition. To the extent that third party measurements of listener hours are not calculated using a similar server-based approach, the third-party measurements may differ from our measurements.
  • Active Users: We track the number of active users as an additional indicator of the breadth of audience we are reaching at a given time. The number of distinct registered users, including subscribers, that have requested audio from our servers within the trailing 30 days to the end of the final calendar month of the period.
  • Total RPM (Total revenue per thousand listener hours): - We track RPMs because it is a key indicator of our ability to monetize our listener hours. We calculate total RPMs by dividing the total revenue by the number of thousands of listener hours; Ad RPM – Ad RPMs are a key indicator of our ability to monetize advertising inventory created by our listener hours Ad RPMs are calculated by dividing advertising revenue by the number of thousands of listener hours of our advertising-based service; Subscription RPM - We track subscription RPMs because it is a key indicator of the performance of our subscription service. We focus on subscription RPMs across all of our delivery platforms. Subscription RPMs are calculated by dividing subscription and other revenue by the number of thousands of listener hours of our subscription service.
  • Total LPM (Total Licensing costs per thousand listener hours): LPMs are our content acquisition costs - as calculated under the rates set by our license agreements with record labels, PROs and music publishers, and to a lesser degree statutory licenses - per thousands of listener hours.
  • ARPU - Average revenue per user is total revenue divided by the number of subscribers.
  • LTV - Life time value is a metric we use to assess the financial value of each customer.
  • RPM reflects revenue per 1,000 listening hours while LPM reflects licensing costs per 1,000 listening hours. We gain operating leverage in our model by increasing RPM and maintaining LPMs at a fixed cost.
  • There are a lot of pieces that drive engagement. At the cornerstone is making the product better from a play listing standpoint. We continue to optimize play lists for our users with an enormous data science team and a constantly evolving algorithm. These core algorithmic improvements underpin a steady year-on-year increase in hours.
  • In addition to our constantly evolving algorithm, is an accelerating level of product improvement, with new products and music experiences such as Thumbprint radio, podcasting, and new music stations.
  • We are also running hundreds of promotional campaigns with music makers leveraging AMP, Pandora’s Artists Music Platform. AMP is becoming a key tool in driving additional engagement and ultimately increasing hours as it allows music makers to connect directly with fans.

Licensing/Royalty Fees

  • We pay higher licensing fees for more functionality and enhanced features, such as skipping and rewinding songs, as these were the most requested features from our users. In negotiating direct deals with the music labels, we were able to enhance our features in our free, ad-supported tier, which we believe will draw a larger audience and drive more usage per user. These enhanced features will also increase opportunities for additional advertising, including higher value video advertisements, which will more than offset the increased costs associated with these deals.
  • We paid more to get more. We know rewind and enhanced skip limit are the two most requested features from our users. We believe users will watch video ads to unlock these highly requested features which will prove to be a significant revenue opportunity over time. We believe offering these enhanced features on Pandora’s free tier will draw a larger audience, increase engagement and provide natural moments for video ad insertions.
    • As we disclosed in our 2nd quarter earnings call, our Advertising LPM was $30.65and we noted that we expect Advertising LPM will increase to around $33. At roughly 20 billion hours a year, this increase in LPM will result in a $48 million headwind to gross profit.
    • We are focused on three key activities to offset this headwind:
      • Increasing hours per user/engagement.
      • Increasing users.
      • Increasing RPMs.
      • Hours per user: This year, with Thumbprint radio, increased podcasts, and new stations we have increased usage by 7%. We believe the addition of enhanced features will drive usage an additional 10% over time, and increase hours by more than 2 billion.
      • More Users: We have 100 million quarterly users. We believe our enhanced features will convert quarterly users to monthly users.
      • Increasing RPM: Our current mix of display advertising, including approximately three video ads per hour yields a $55 RPM. We believe video ads - have the potential for high view ability metrics in Pandora’s environment as compared to other platforms where users are less engaged and will drive a 50-100% premium compared to our audio ads. At an approximate CPM of $25-$30 for a video ad, we can serve as few as one video ad per 10 listening hours to offset an LPM increase. We believe we will be able to increase video ad load over time and drive RPM significantly in excess of LPM. We could also substitute other ad formats, such as audio, to drive RPM in excess of LPM. We plan to optimize our model while delivering the best user experience across each product tier and monetize accordingly.
  • While we did go from a 50% contribution margin on subscription to a 35% contribution margin, we gained substantial incremental features that we believe will drive user growth and thus increase contribution profits by volume. At 6.0M users we calculate a neutral contribution margin.
  • For the first time in 16 years, the music industry is growing. The reason is the success of streaming and subscription music services like Pandora. The music industry is realizing that in order to grow faster, they need to embrace and work with distribution partners like us which is why were able to complete the negotiation of our deals. We have a great relationship with our partners and they want us to succeed.

Subscription

  • Pandora Plus is an extremely compelling service for users. Unlimited rewinds, skips and offline storage are huge improvements to Pandora’s subscription service and we have already converted 4 million Pandora One subscribers to Pandora Plus, and we believe we will continue to convert more over time.
  • The Pandora One product gross margins were 53% as of last quarter, excluding fees paid to Apple and Google. About 2/3 of Pandora One subscribers do pay through the app store, while the remaining 1/3 of payments are direct via mobile web. After App Store fees we generate approximately $75 million of net profit annually on Pandora One.
  • For Pandora Plus, content fees have increased compared to the previous CRB rate of roughly $15 million, however, we are providing users with increased functionality and enhanced features that we believe will attract more users to Pandora Plus and more than offset additional costs. We believe we can drive an additional 2 million new subscribers, bringing the total number of Pandora Plus subscribers to 6 million by 2018.
  • Without disclosing the terms and conditions of the deals, it is fair to assume that while we decreased contribution margins on subscription near term, we gained substantial incremental features that we believe will drive an increase in users and increase contribution margins longer-term via volume.
  • The ability to instantly solve pain points experienced by our listeners by upselling and cross selling products that fit their needs. For example, if you are an ad-supported user who hits their skip limit, at that moment we can serve a display ad that says “You’ve reached your skip limit, start a free trial of Pandora Plus to get more skips.” We can do the same thing with replay and offline.
  • On-demand is ripe for disruption, currently limited by 30 million songs in a search box. They give subscribers massive access to music but are hard to use and time consuming – on that dimension we will excel.
  • Pandora launched radio in a market with multiple online radio products claiming to be personalized but Pandora improved on those products and we plan to do the same thing in on-demand.
  • We expect to launch Pandora’s on-demand product later this year.
  • We have not announced how many songs will be made available as it is not a limiting factor for our services.

Advertising

  • We expect there to be a trade off in converting our advertising audience to subscribers; however, the unit economics for subscribers are higher, on per user basis.
  • The deals we’ve done actually enhance our ad business through increased functionality, such as increased skips where we have an opportunity to serve a higher value video ad.
  • The subscription products carry a higher ARPU. Pandora Plus has an ARPU of $60 while the radio product has a $15 ARPU. We expect the on-demand product which will have an ARPU of $120.
  • We expect new features and functionality to convert about 10% of listeners to subscribers. For listeners that we don’t convert, we believe Pandora’s new features and functionality will drive greater frequency of use and engagement for the ad business.

Financials

  • We aim to capture an outsized share of our massive market opportunity, via our marketplace platform approach, by reaching approximately 100 million monthly users by 2020 and a $4 billion annual revenue target. Our total revenue assumption is based on $2.4 billion from our core ad-supported business which includes Pandora Plus, $1.3 billion from the subscription business and $300 million in ticketing revenue.
  • Ad-supported business: The label deals enable new features/functionality which provide us with multiple monetization opportunities to reach our $2.4 billion target.
  • Subscription business: There are roughly 119 million global music subscribers today with approximately 53% year over year growth. Our goal is to convert the equivalent of 10% of our projected user base in 2020 to Pandora Premium, which will result in an estimated $1.3 billion subscription business at that time.
  • Through market research, we believe we can achieve 10% penetration of our projected 110M user base by 2020.
  • At this scale, of roughly 11 million estimated subscribers, we can realize a 35% contribution on this $1.3B revenue stream.
  • Prepaid royalties for Q3 were $90M which is entirely recoupable.
  • The music labels are our partners. The better we do, the better they do. The music labels want us to have profits in this service so we can add more subscribers and grow – which is good for the music labels too. Typically – the way streaming music deals are structured with the labels is on net revenue after payments to Apple / Google. As we said – the labels are our partners, they help share the burden and cost of the app stores.

Market Opportunity

  • More than 190 automotive models with Pandora integrations have launched.
  • More than 18 million automotive activations.
  • Approximately half of music listening takes place in cars, so the opportunity is sizeable when you consider that 16.4 million cars were sold in the US in 2015.
  • We have partnerships with 26 major auto brands and are currently available in the top 10 bestselling cars.

 

  • We are on over 1,800 CE devices.
  • We have more than 36 million activations.