Home As Digital Revenue Grows, Will the Web Finally Disrupt Radio?

As Digital Revenue Grows, Will the Web Finally Disrupt Radio?

Internet radio service Pandora posted its first financial results as a public company yesterday, six months after filing for an IPO. While the company may not yet be profitable, it’s off to a pretty good start in terms of growth. Its total revenue grew 117% year-over-year and its total listeners grew 125%.

Contained amongst these investor-pleasing stats was another takeaway: The company is now commanding ad rates comparable to those sold on terrestrial radio stations, as GigaOm pointed out.

Pandora made $67 million in revenue during the second quarter, the vast majority of which was from advertising. As one analyst noted, the company is now generating more revenue per 1,000 listening hours than its traditional counterparts.

Traditional Radio Still Dominates

These facts come with one huge, obvious caveat. As Pandora CEO Joseph Kennedy stressed, the company still has only a tiny percentage of the total listenership of radio. It commands less than 4% of total U.S. radio listening and lost $1.8 million in Q2. And while terrestrial radio has had its share of challenges like most traditional media industries, at $17 billion per year it’s far from the brink of death.

Still, the trends reported in Pandora’s financial data suggest some serious long-term viability for Internet radio. In 2010, terrestrial radio revenue increased 6%, which was a big deal because it was the first year-over-year increase the industry had seen since 2006. By contrast, Pandora is reporting quarterly revenue growth of 117% and the company expects that growth to continue.

The Web is Better For Content, But What About Revenue?

That the number of people listening to Web-based radio services like Pandora is growing is hardly surprising. Compared to the limited, one-size-fits-all form that FM radio music stations have taken, the option to stream music based on one’s actual tastes would seem to offer the ultimate alternative. Long gone are the days when program directors and media executives decide what people hear, see and read.

But that’s not news. The Internet successfully disrupted the way content is distributed and consumed awhile ago, and yes, it’s done an excellent job. What it has struggled with, in many cases, is finding a business model to support those new means of content distribution. Internet radio appears set to do that in a way that would make newspapers and magazines jealous.

To be sure, print media would kill for the ad rates Pandora is commanding. Many of them are rethinking the advertising-supported model for online content in favor of paywalls and subscriptions. Meanwhile, for Pandora relied on paying subscribers for only about 13% of its total revenue. Of course, there are reasons why advertising seems to be so much more effective for the likes of Pandora, starting with the differences in format. It’s safe to assume that a 10-second audio ad combined with a homepage takeover on Pandora.com is going to command more money than a skyscraper banner ad on a newspaper Website.

At the end of the day, it’s still early in this game. This was literally Pandora’s first-ever earnings report as a public company. While the company’s revenue is growing, so are its operating costs, which include pricey content acquisition arrangements and an increasing marketing budget. Still, if Web-based music services like Pandora and its competitors can continue to hammer out a viable business model, the future of radio may sound very different.

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