The way you listen to music is in jeopardy. Here’s how Pandora plans to survive

The subscription music streaming industry has surpassed its novel beginnings to become an integral part of everyday life for many of us. On-demand audio streaming accounted for most of the audio consumption in 2017, which saw a whopping 400 billion streams, according to Nielsen Music. Hundreds of millions of people stream music every month through Spotify, Apple Music, Pandora, and other services.

There’s just one problem: All of the biggest streaming services are losing money.

The biggest reason for these massive losses are the large amounts of money in licensing fees those services have to pay to rights holders, primarily record labels, in order to stream copyrighted songs. Spotify has spent nearly $10 billion in licensing since 2006, while concurrently incurring $2.9 billion in losses over the same time period. In March 2017, Pandora — known best for its radio-style streaming tier — launched its first on-demand subscription streaming service, Pandora Premium, and has also had trouble turning a profit.

Elizabeth Moody, Pandora’s vice president of global content licensing, has been navigating the changing music landscape for more than a decade while working at a litany of streaming services such as YouTube, Myspace Music, BitTorrent, Kazaa, Rdio, MOG, and Imeem. Digital Trends spoke with Moody about what needs to change in order for music streaming services to become profitable, if Pandora could ever become a record label itself to cut licensing costs, and how music streaming compares to streaming video.

At last year’s NY:LON Connect conference, you said subscription streaming still hasn’t hit the mainstream yet, as the age demographic still skews younger. Do you think that means there’s going to be more growth in the next few years? How far do you think we are from “mainstream” acceptance?

Elizabeth Moody: I do think there’s still opportunities for a lot more growth. Those of us that are sort of more centered on the East Coast and the West Coast of the United States tend to forget that a lot of folks in this country — and perhaps even more so than in Europe — are not really day-to-day tuned into, particularly, subscription streaming. If you think about sort of Middle America — and we know this from Pandora usage as well as from our music industry partners who tell us — most of those folks are still primarily consuming [music] via terrestrial radio, and moving more over toward services like Pandora. So, if you think about the middle of the country, [Pandora is] probably competing more with terrestrial radio than … other streaming services. Pandora is particularly unique in that we are sort of bridging the gap between terrestrial radio and streaming.

So, we do have a little bit of a different demographic than some of the other streaming services. But, across the board, you haven’t seen mainstream acceptance yet. I think to answer your question of how far it’s going to go, it’s kind of interesting because, back many years ago, there was a feeling that once we’ve reached 100 million subscribers that it was going to be profitable, and everything would be great. That hasn’t happened, probably because of the lowering of the pricing, and the subscription tiers. I think the truth is there’s a lot more potential that we’re not even, as an industry, we’re not fully aware of just how far it can go. I’m speaking specifically about ad revenue and subscription streaming.

As you alluded to, there’s no secret that subscription streaming services have had trouble turning a profit. Spotify’s lost billions of dollars. Pandora has lost money since debuting Pandora Premium. Do you see this stabilizing anytime soon? If so, how?

It’s an interesting question, and one that folks like me, who have been in the music industry for quite a while, are still struggling with. I think that it’s going to take a shift in the structure of the industry to really allow digital services like Spotify or other competitors to have a fully sustainable business. You see pure-play services like Spotify and Pandora suffering while there are companies like Amazon and Google and Apple that can use music as a loss leader for other services. I think if we want to do the right thing for artists, and record labels are realizing this too, they need to support more of the pure-play services. I think that is going to need a little bit of a shift in the way the record labels and music publishers interact with their audience, and that might mean that they have to adjust the way they pay the artists, and get a little bit more transparent about how royalties are shared between digital services like Pandora and the artist. I mean, right now, the record labels (and then the music publishers) are really taking the lion’s share of the revenue. You know, sometimes the artists or others will argue it’s getting stuck at the labels. I think it’s a more complicated problem than just saying, “Oh they’re not paying the artists.”

Naturally, their record labels don’t have tons of money, either. But I think it’s going to require a slow shift toward different models on the A&R and distribution and label side, so you see newer companies starting out that perform some of the functions, but in a more modernized manner, and they’re a little bit more lean. They tend to be more administrative and distribution focused, more data driven in terms of figuring out who the next acts are going to be. Just more lean, and less overhead, and I think that it’s going to take some time, and we’ll get there, but it’s going to require the labels to adjust their business models, just like it’s going to require digital services, like us, Spotify, and others, to scale more.

Have you spoken to any record labels about changing their ways of licensing music and maybe asking for a lower share? Has that been a conversation Pandora’s had?

We’re trying to work through the fact that we aren’t meeting all of our guaranteed payments. I think a better way for me to answer is labels are getting pushed by all of the digital services, including Apple, Spotify, us, Tidal, and everyone out there, to adjust their [revenue] share, their licensing rate. There’s been a little bit of change in the past several years, but it’s pretty modest. Frankly, I don’t think it’s enough that it’s going to cause an immediate shift in the economics for us or for Spotify. I think it’s going to take a little bit more time, like I was just saying. I have noticed a shift in the sense that they seem willing and focused on pure-play services, as well as the Amazon, Google, and Apple’s of the world. I think they’re trying to be more democratic about how they approach everything.

When services like Apple Music and Tidal debuted in 2015, they were both going to exclusive-album war, with each one having big-name albums they used to attract subscribers. Pandora has done exclusive-album release events for its Up Close program. What is Pandora’s attitude toward licensing exclusive music for its listeners?

The exclusives that we did are a little bit different than what they’re doing. So, Apple and Tidal try to steal away from the other services the new releases from some of the artists. The Kanyes, the Beyonces, and some of the others. We’ve taken a different approach to that. I think that — I believe this is Pandora’s stance as well as my own personal view — that those exclusives may be appealing to certain artists in the short term. They’re certainly good for digital services, to the extent they can steal other consumers away. But in the long run, they’re not good for the fans, and I think some artists are starting to realize that the short-term money may not make sense in the long term. Let’s say they’re forcing their fans to leave Spotify and go to Apple to listen to the music. As this streaming landscape matures a little bit, it’s going to be harder to get people to move from one to another. You’re kind of really making your fans suffer, as an artist, when you’re doing those types of exclusives.

Jamie McCarthy/Getty

The other thing about those exclusives is that the publishers that represent the songwriters don’t get paid for those exclusives. So, unless the artist also has written the underlying song, they’re going to have to start thinking through, “Gosh, am I compensating all of the other contributors to this work?” To answer your question of what we’ve been doing at Pandora, we’ve been, like you said, working with artists around new releases, but not trying to go exclusive with their own, already-created studio recordings that get delivered to all the services just like us. What we have done, and we’re continuing to do, is take the artist into the studio, in a nice, smaller setting, and record some of those performances live. In live recordings that we work on with them, we’ll have a period of time where we’ve got exclusive rights to those unique recordings. So, what we’ve done that way, as opposed to try and take an exclusive right on the album recording, we’ll have a unique sound recording that we create with the artist at that event, and that’s where our exclusive rights come into play.

That is an interesting angle to take in the exclusive content game. That way you aren’t taking an album from fans on different services. The artist still gets to spread their music the same way they would as if it was live at a show.

Exactly, that way the artist isn’t worried about upsetting their fans, they’re still getting that extra attention, they’re getting that extra promotion, they’re able to sync it up with some of the tools we have to promote. So, it actually has been working really well. It has a lot of the same impact as doing an exclusive with Apple or Spotify. The reason the artist does [album exclusives], of course, is to get the big payout. But also to promote their new release. I think the promotion of it actually, in many ways, may be just as, if not more, impactful doing it the way we’ve elected to do it. We just don’t think it makes sense to throw a ton of money just for a a short-term exclusive that doesn’t have a lot of strategic promotion behind it.

Chance the Rapper is one of those rappers that’s done those streaming-exclusive releases. He’s also shown that it’s possible to be successful without being signed to a major label. The reason streaming services are losing so much money is because labels and music publishers are taking the lion’s share of the revenue. Has Pandora ever considered working with unsigned artists to distribute their music like a record label? Would that model be beneficial for your listeners and Pandora’s bottom line?

We do actually work directly with a lot of unsigned artists. Chance is a good example, but there’s a ton of artists like him that don’t have their own record label. Maybe they create their own [label], and they’ll sign up to do sort of the operational distribution of the files through a company like CD Baby or Tunecore, who are aggregators of unsigned artists. So, that’s how they’ll get their content originally on Pandora. But then we also work hand in hand with some of those artists that either reach out to us because they’re super-interested, or we’ve selected as being up-and-coming based on some of the data that we’ve been able to observe.

Or, we make available to every single artist that is on Pandora tools that are self-service through the artist marketing platform that’s available, and they can go record in their own voice a message to their fans that gets played at the beginning or the end of their song on their station, and it’s directed to their fans. They can, for example, promote a new album that’s coming out,  or, based on location, promote a concert they’ve got going on. So let’s say I’m traveling to New York next week and one of my favorite bands is touring in New York. If I’m listening to their station, I might get a notification from the artist telling me that.

They can also use those tools to promote what we call feature tracks. So, if they’ve got a new release, they can upload it, and we’ll spin it a little bit more. We’ll sort of promote it in a way that it gets some some viral attention before the Pandora algorithm kind of takes over and makes it more natural. So, we find a place like that artist station, or similar artist stations, where we might find that their fans would appreciate hearing it a little bit more. We’ve actually been breaking quite a few artists working directly with artists.

Pandora gives these artists the analytics, and is able to share them on a platform with 75 million active monthly users. You’re doing a lot of things that record label would do. What’s stopping a streaming service like Pandora from signing artists and becoming a record label?

I don’t know that it’s something that makes sense in the short term for us to do. On the other hand, like you said, we are creating new content, we’re creating new songs with the artists, but giving it back to them. Maybe the definition of what is a record label is going to change. But, to ask, “Why doesn’t Pandora become a record label,” almost implies that we would require taking exclusive rights to some of those recordings. I think that’s where it gets a little bit complicated for artists and their fans because don’t they want to have multiple streams of distribution? If I’m an artist, am I going to sign up with Spotify or Apple or Pandora as my record label? I don’t know. I’m excluding all the other distribution platforms. It sort of forecloses other distribution platforms. It works a little bit in the video space. The video space is a little different from music, because when you’re a consumer signing up for a music service, you really expect that all music from all artists is going to be made available to you.

It’s not like Netflix or Amazon Video, where you’re OK with maybe having a number of different places to go. Although truthfully, I worked in over-the-top TV for a little bit, and I think they’re struggling with some of the same issues. I was sitting on the couch last night, and I’m like, “Wait, is this show on Netflix or on Amazon?” I think the music platforms have maybe started earlier, and in some ways maybe evolved to a place where you can get whatever you want whenever you want. That’s become a consumer expectation.

So, the Netflix strategy of creating your own content might not work for a streaming service like Pandora.

It might not. It’s interesting, because you think about video, and it’s very popular to compare it to music. There’s a number of things that are different about it. With music, we expect that people are going to listen to the same song over and over and over. Not just for a period of time but potentially for the rest of their life. With video, unless you’re a kid, you’re probably not going to have that repeat consumption. The other thing with music is that, when I’m watching a show on Netflix or even TV, as much as I might be good at multitasking, I’m pretty much watching that show. Whereas with music, I can be driving, I can be working, I could be doing a number of other things at the same time while fully engaged in the music.  So, there’s just more hours of the week we have available to reach people.

We recently had an interview with former Guns N’ Roses drummer Matt Sorum about his new service Artbit, which is using blockchain-esqe technology to cut out the middleman and allow artists and everyone involved in a song to get paid. What do you think something like blockchain can do for a company Pandora?

I think right now it’s very popular. It’s sort of the hip thing to talk about. It remains to be seen how effective it is going to be because it requires a lot of different players in the industry to be cooperating. There’s been a number of tries even before blockchain to try to get data systems integrated across the industry both in Europe and in the U.S., and it’s been challenging. But I think with that technology, there could be great ways to leverage blockchain to help with rights management. There’s still a massive lack of data, especially on the publishing side, of who owns what, and the blockchain technology could simplify that, and automate it.

We’re looking at all of that like other services are too. It does still lean on collaboration with artists, the arts community, the publishing community, and the labels to really make it compelling. There are a lot of ways to sort of get started in it and help artists directly before maybe the bigger labels get involved. We’re at the beginning stages of that. It’s going to be interesting to see.

You were the head of strategic partner development at YouTube before you joined Pandora. How, in any way, did your experience with YouTube influence the decisions you’ve made at Pandora?

Probably in more ways than I can even realize myself. I’ve been working with a lot of streaming services before that, including Myspace Music, Imeem, Spotify, and MOG, many of which aren’t around anymore. The YouTube experience was such a focus on video, and maybe more importantly, user-generated content. So it gave me different lenses through which to look at a music service. I think that it certainly made me aware of the importance of user curation, as well as maybe the downsides to some of YouTube, which is it’s not the cleanest place to look for something you want to find. There’s a lot of value to a more curated, more professional experience like you have on Pandora, where it’s not muddied with a lot of user-uploaded content. That’s been one of our goals, to keep it a little bit cleaner and easier to use.