Last week, Pandora announced their first post-IPO earnings report. They did post a loss, but they had higher revenue than Wall Street expected. This was not only good news for Wall Street, but also for artists and labels who get royalties from Pandora airplay.

The one question that I saw dominate the headlines was the question of whether the launch of Spotify had any impact on their business. CEO Joe Kennedy responded by saying, “We haven’t been able to discern any impacts from the new digital music initiatives that have launched over the past three to six months.” I guess since Spotify is the music buzz service of the month this question would make sense. However, Spotify’s most recent U.S. number had them at 1.4 million users while Pandora hit 100 million registered users in July and regularly shows over 30 million monthly users. Quite frankly, I think my 5 year old daughter could have discerned that Spotify would not impact Pandora’s business today.

However, it’s what Kennedy said next that is the most important take-away for you Futurehitmakers to understand how to interact with both services. “Fundamentally, Spotify operated in a different segment—owned music, subscription music, leased music, whatever you want to call it. We really operate in radio, where there’s such a strong tradition of ad-supported, free-to-the-consumer music.” This is not just earnings report spin, this is about as factual as they come. Saying Pandora and Spotify are competitors is to say that Power 99 and Wal-Mart also go head-to-head.

These are two separate businesses with different expectations from the consumer. Pandora is a very passive experience, which is often preferred by most music consumers. A person hits a button and gets music for hours on end without any effort. Spotify is a mostly engaged experience, whereby you have to actively find and play each individual song. A passive experience can be had thru playlists, but those are not as inherently passive as a radio experience. Much like someone might listen to the radio on the drive into the office and then listen to a CD at night, it’s entirely logical that a person might listen to Pandora while cleaning the house, but create a Spotify playlist for the party they cleaned for.

This distinction is also reflected in the amount of earnings you can receive from these outlets. SInce Spotify allows on-demand plays while Pandora gives you extremely limited choice in the music you want to hear, Spotify ends up paying 2-4x the royalties for each play. Again, this is not unlike the current situation between retail and radio. Buying a CD or a download is ultimately paying a premium for the ability to listen when you want. Radio pays less (and in the US, only to songwriters) but makes up some of that gap with their sheer volume. Again, different businesses.

The discovery of new music is also greatly different. I would argue that Pandora’s structure for discovery is fundamentally better. Like radio, you’re listening in the background and a song you know nothing about comes out of nowhere. You weren’t prepared or expecting it. It just shows up at your doorstep. Granted, Pandora’s song choices have strayed away from true new discovery in recent years, but it is set up well when it does occur. On Spotify, you have to know that the song exists from another source to find it and listen to it. You can also “discover” it from noticing a friend interacting with the song on their feed. Even then, something about the recommendation (the cover, the person, the song title) has to grab you in order to hit play and actually discover it.

There is one common element outside of the music itself for musicians to fundamentally understand. That is the need to get your song played over and over in order to earn money from recorded music. Throughout Futurehit.DNA, I detail how you can make your song more likely to be played over and over. This is crucial to understand as it becomes imperative for any song moving forward. You can’t rely on the high premiums one used to receive from a retail sale. To get those same revenues, people have to listen to your song dozens of times. How many songs that you discovered this year have you listened to more than ten times?

As separate music business categories, Spotify will not eat into Pandora’s business. Instead, both businesses, along with many others, will grow into unique, strong platforms that will be responsible for large portions of your revenue. Creating music to fit those platforms will only ensure you can profit from their growth.

By the way, despite the endless ink you see on both services in the music press, it’s always enlightening to see what the average person knows of these services:


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  1. Tia August 30, 2011 at 2:29 pm # Reply

    I couldn’t agree more. Its true that they are both subscription based models but since they have such a different offering and attract such a different customer it’s unfair to say they are competitors or pulling business away from one another. Right on.

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