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Free music site adds ads
Oakland-based Pandora experiments with 15-second breaks
Published: Wednesday, January 21, 2009 at 4:24 a.m.
Last Modified: Wednesday, January 21, 2009 at 2:51 p.m.
Change has come to Pandora.com, the popular free music site that lets listeners craft Internet radio stations to fit their tastes.
The Oakland-based site added 15-second commercial breaks to its streaming music service Tuesday as it continues to experiment with new ways to generate revenue.
But its founder promised the site will never carry as many ads as broadcast radio, despite the fact it pays substantially higher royalty fees to the recording industry.
"The fears people have about it overtaking the listening experience are unfounded," chief executive Tim Westergren said. "It's going to be a fraction of what you hear on broadcast radio."
The changes affect the 21 million users of its Web site and 3 million people who use its iPhone application, which was the most-downloaded app of 2008, Westergren said.
Pandora experimented with similar audio ads two years ago, but has since left the site nearly devoid of radio-style commercials, relying instead on display ads.
In Pandora's latest audio ad experiment, a brief plug for the Fox TV show "Lie To Me" interrupted the music stream of some listeners for 15 seconds after they played 10 songs on Tuesday. The same commercial interrupted again about 20 songs later.
"We're trying different things out right now," Westergren said. "It's certainly going to be part of our future."
On average, people will hear a 15-second commercial about every two hours, Westergren said. The ad campaign is targeted and will not affect all users.
Fox Broadcasting is the only advertiser in the campaign, which also features a plug for "American Idol," Westergren said.
These changes were not unexpected, as online music providers face royalty fees substantially higher than other music providers such as satellite and broadcast radio.
Rate hikes nearly sank Pandora and other online music services two years ago. Under the gradually increasing rates set forth by the U.S. Copyright Royalty Board in 2007, Pandora.com would not be able to operate profitably and would have to fold, Westergren said at the time.
While broadcast radio pays publishing fees, it does not have to pay the much higher performance fees that online services must also pay.
For instance, The Krush radio station in Sonoma County paid about $5,000 in publishing fees in 2007 to the recording industry to reach about 30,000 listeners a week on its FM signal. But under the federally mandated ruling, it was required to pay more than double that -- about $11,000 a year -- to stream its radio broadcast online to just 100 listeners a day.
The royalty fees were set to increase through 2010, when The Krush was required to pay about $20,000 a year. And if the number of people listening online doubled, so would its fees.
Since then, the recording industry has agreed to hold off on collecting the fees, a decision that online broadcasters credit with their continued existence.
Westergren said Tuesday that the two sides would announce an agreement on lower rates soon.
"We're just wrapping it up now. It's already kind of gone through the hairy part," Westergren said.
Westergren said he was not sure how big a slice audio ads will play in future revenue. Last year, most of Pandora's $25 million in revenue resulted from display ads. Pandora users can pay $36 a year to get the service without advertising.
It remains to be seen how listeners will react. Some might move away from Pandora and listen to other options that don't have interruptions, such as iTunes or a friend's music stream.
One Pandora listener used Twitter to voice displeasure on Tuesday, "Even though I understand and I knew it was inevitable...booooo for hearing my first Pandora advertisement."
Another said, "Pandora just threw a radio ad at me, and that's the end of that. I will never use Pandora again. Sorry, but that's why I don't do radio."
Still, other listeners are likely to take the changes in stride considering broadcast radio stations also inject commercials. Plus, the popular online video site Hulu.com is rapidly attracting users despite commercial breaks inserted into the TV shows and movies it streams.
"Like any business we have costs, and we have to figure out a way to make it work," Westergren said.
You can reach Staff Writer Nathan Halverson at 521-5494 or nathan.halverson@
pressdemocrat.com. Check out his blog at www.DailyGeek. Pressdemocrat.com.
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