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Pandora’s Rdio Acquisition Sets Stage for Epic Streaming Music Battle

The details behind Pandora’s recently announced purchase of digital music service Rdio sound all too familiar: A startup that bit off more than it could chew went bankrupt, and had its assets acquired by a bigger and better-financed competitor. But look beneath the surface, and there’s a much larger story about changing music consumption habits, failed monetization models and consumers caught up in an overly fragmented industry seemingly on the verge of consolidation into a handful of dominant brands.

Shortly after Variety exclusively reported about acquisition talks between the two companies, Pandora announced the $75 million deal, but with a few wrinkles: Rdio would file for bankruptcy and shutter its service. In addition to hiring a significant number of Rdio’s employees, Pandora wants to use its technology and team to launch a paid on-demand service that will allow users to listen to entire albums, or pick and choose individual songs — similar to what Spotify, YouTube Music and Apple Music are offering. The company wants to use those new features to enter international markets as well, according to Pandora CEO Brian McAndrews. “It will just be a strong offering from the get-go,” he tells Variety.

Though Pandora’s new service won’t launch until later in 2016, analysts think it can challenge the category’s well-capitalized incumbents. “If Pandora’s product is of equal or better quality, it is still likely not too late,” wrote Credit Suisse research analyst Stephen Ju in a note to investors. Morgan Stanley analyst Benjamin Swinburne agreed in his take on the deal: “Pandora brings with it a well-known brand, nearly 80 million active monthly users, and relationships with labels and artists that are improving.” In other words, the company may just be able to pull this off.

L-Dopa for Variety

For Pandora’s investors, the shift toward on-demand can’t come soon enough. Pandora’s stock tanked in October after the company revealed that Apple Music’s launch had caused its number of monthly listeners to decline. One way to grow Pandora’s audience is to go global, but Spotify and its 75 million monthly active users worldwide would have made an international expansion hard to pull off without a full on-demand component.

But the company also thinks it can monetize streaming music better than its competitors. “We know a tremendous amount about our listeners,” McAndrews says. Pandora wants to use all that
data to become a universal destination for all things music. Users will come for the free streams, which Pandora will continue to monetize with its billion-dollar ad business. Some will subscribe and pay, some will keep listening for free. And all of them will get recommendations for concerts in their area, sold by Ticketfly, the ticketing startup that Pandora acquired for $450 million in October.

That kind of revenue mix may be necessary for Pandora to thrive, because much of the company’s streaming revenue goes straight to music rights holders. “They’ll never be able to turn a profit delivering music,” believes MP3.com founder and digital music pioneer Michael Robertson. “The royalties are too steep.”

That’s long been a problem for streaming music businesses small and large, and Pandora isn’t the only company looking to make money elsewhere. Apple Music is closely tied in with the Cupertino firm’s hardware ecosystem, positioned to help the company sell more iPhones and Apple TVs. Google has started to more closely align its music service with YouTube in an attempt to increase monetization of its video platform in October, and Spotify is venturing into original content hoping to keep a bigger slice of the pie on works it owns. Across the board, music subscriptions are becoming just one part of a bigger revenue mix.

This leaves the future of a number of other services in limbo. Rhapsody, Slacker, Deezer and Jay Z-owned Tidal all have been banking on scale to eventually make the numbers for pure-play music subscription services work — and spending big to grow users through splashy marketing campaigns and acquisitions of competitors. Many in the industry believe that further consolidation is inevitable after the Rdio deal. “Slacker and Rhapsody are next up on the music-service death watch,” muses Robertson. Slacker’s CEO Duncan Orrell-Jones argues that his company can stay independent, but agrees on one point: “It’s likely that there will be additional transactions,” he says.

Granted, some aspects of Rdio’s demise were unique to a startup whose ambitions were always much bigger than its number of actual users. The company spent years perfecting its product but little time on marketing, and long resisted introducing a free, ad-supported tier like the one used by Spotify to get people hooked on the service. That was a strategic mistake, argues Deezer North America CEO Tyler Goldman: “The freemium model is the best model for a new product category like paid digital music subscription,” he notes.

All this led to Rdio losing money, lots of it: A bankruptcy filing reveals that the company hemorrhaged around $2 million each month. It had only an estimated 150,000 subscribers worldwide.

In the end, the ones paying the price for such failures may be consumers who jumped onto the digital-music train early on. Most music services offer virtually the same catalog, licensed from the same labels. To keep people from switching back and forth, they make it hard to leave — harder, in fact, than other
businesses. A mobile phone subscriber can easily take his number and address book from one carrier to a competitor. Taking playlists and music libraries from one service to another is much more complicated.

That needs to change, argues Jason Herskowitz, founder of the cross-platform music player Tomahawk. “The less friction there is around sharing music between paying subscribers,” he notes, “the larger the market will grow.”

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