Pandora Media, Inc. (NYSE:P)
JP Morgan Small/Mid Cap Conference Call
December 10, 2013 15:00 ET
Dominic Paschel - Vice President, Investor Relations
Doug Anmuth - JPMorgan
Doug Anmuth - JPMorgan
Alright, great. Good afternoon everybody. Thanks for being here today. My name is Doug Anmuth. I am the internet analyst at JPMorgan. It’s our pleasure to have Pandora with us today, Dominic Paschel, Vice President of Investor Relations. So Pandora is the leader in the internet radio in the United States with more than 70% market share. Many of you of course know the story, but they offer personalized experience for each of their listeners adapting their playlist in real-time based on individual feedback from listeners. They have more than 200 million registered users. The company has in most recent month more than 72 million active users, about 8.5% share of total radio time in the U.S. and they are actually streaming about 1.5 billion hours of music each month, 80% of that coming through mobile devices.
So Dominic previously was Director of Investor Relations at SuccessFactors. He was there through the IPO and until the acquisition by SAP, previously worked on product strategy and Investor Relations at salesforce.com. And this is one of the few companies, I think maybe while here while you are at the conference, you can actually sample the product. And I think Dominic is probably going to give you a little bit of that, but so he will give you a little bit of presentation on the story and then we will jump into Q&A and sort of breakout after that. Thanks Dominic.
Dominic Paschel - Vice President, Investor Relations
Thanks Doug for having us here at the conference. We just have a brief message from our Founder to give you the Pandora image.
Cool. Thanks Doug again for having Pandora here at your conference. My name is Dominic, Head of Investor Relations and Corporate Finance for Pandora having been with Pandora since the initial public offering. So the next slide you will notice is our Safe Harbor. We are listed on the New York Stock Exchange under the ticker P and please read our disclosures on our Investor Relations website. Let There Be Music that was the video that you just saw and available for those who are on webcast to see at Youtube. That is really defining of our goal at Pandora, which is to redefine radio for a connected world. Only today is internet connectivity reached the levels of radio waves to the point where this is the next and perhaps final medium right for disruption due to the internet.
When you look at how radio is consumed in the United States roughly 92% of the U.S. population listen to radio on a weekly basis that’s roughly 240 million people in the United States, in Australia and New Zeeland that would add an additional 27 million between the two countries. When you look at how music is consumed, historically we have always had physical differences when you think of the two major modes of consumption. You had radio and you had on-demand music. In 60s you had radio and vinyl records. In the 70s you had radio and 8-tracks. In this 80s you had radio and cassette tapes. In the 90s radio and CDs. And now in the 2000s and the 10s we have radio and on-demand digital services. And when you look at the marketplace that Pandora is looking to replace and to ultimately provide with a better service due to the connectivity of the internet and the benefits of the internet, its really broadcast radio and that amounts to roughly 80% of the consumers time spent with music.
When you look at how radio is consumed roughly 47% takes place in the auto, 35% in your home and 18% which takes place in your office was really kind of the beginning the roots of Pandora back in 2006 when we launched the service. We are combining the best of broadcast radio with the best of the internet. When you look at the foundational blocks and the hallmarks of radio, you look at four major attributes. Free ad supported to the consumer, zero work, no effort, ubiquity, everywhere you go you can hit a button and automatically music starts streaming or playing out to you and ultimately discovery where you find new pieces of music, where you discover new artists, bands. Ultimately becoming the soundtrack of our lives combined that with the best of the internet which is personalization interactivity one-to-one and you have what Pandora has created in terms of internet radio as the powerhouse.
When we last spoke we have made tremendous progress in terms of our commitments at the time of the IPO, tremendous growth, our registered users now top 200 million, which has climbed nearly 120%. Our active users are now at around 72 million as of our latest monthly update. When you look at the amount of feedback Pandora gets which ultimately drive-in power of the engines of the algorithm, we have literally grown that three fold over the last two years. Where now it’s not only a lead, it’s an accelerating lead that is benefiting from the network effects. When you look at or listener hours as Doug mentioned we are now doing 1.5 billion hours a month that rivals the amount of video that’s streamed in the U.S. by YouTube.
When you look at the amount of radio market share, we have grown as of the last monthly release, up from 8.1%. At the end of the third quarter we have grown that now to a record 8.4% of all of the broadcast radio. When you look at the revenue growth it’s been tremendous growing from a base of about $67 million to now one that who is quarter’s top nearly $180 million. When you look at just the pure impact and foundation we have in terms of mobile revenue, we are third only to Facebook and Google. We are on a revenue run rate of mobile that puts us in the $0.5 billion annual run rate. And ultimately when you look at the key report card of how we are doing, how we are monetizing, one of our key metrics RPM you look at how that has grown from the $24 range now topping nearly $40 per thousand hours. So we are achieving on all aspects of our goals and aspirations to redefine radio.
When you look at the market share and the tremendous runway just in one country that we have, Pandora has just 8.4% of radio. Often times the press and others write about who they believe our competition to be. We view broadcast radio is our prime competition. We view the hours that you will spend on average 26 in the car listening to those hours as a total that’s roughly 56 hours per month
When you look at the separation, we have between any of our nearest competitors that do stream, Pandora has dominant market share. We have over 71% of internet radio at this point and that’s a lead that has only since accelerated from around 50% at the time of the initial public offering. We view our proprietary lead really as it relates to the technology around the algorithms. And again, the thumbs that feed the dynamic nature of those algorithms, the strong unassailable brand of Pandora, you can anyone who works for Pandora is very, very lucky, because we don’t often have to explain what we do.
And as Doug said, many of you probably actually have Pandora applications on your smartphone or perhaps it’s on your Samsung TV or perhaps even in new car. We have significant scale. What we do on the scale of nearly 200 million people in the United States lends itself to a tremendous advertising power, one whose access is only granted when you reach those levels of 50, 60, 70 million active users, which we have in the United States and elsewhere. And finally, multi-channel distribution, many, many different consumer electronics makers and device makers, automakers use Pandora as a way to differentiate their products, use it to demonstrate the future of how they see their own products headed.
When you look at the personalization technology that Pandora pioneered, the genesis have really started with the Music Genome Project back in 2001. That was where Pandora music analyst essentially dissected each song that would undergo this analysis, this rigorous analysis, anywhere from 280 all the way up to 450 different attributes. We would take that and help it relate to other pieces of music that perhaps were lesser known. We merry that with the data that we get from newest users on average, it’s 7 times an listener hour that we get some form of feedback, be it skips, thumbs up, thumbs down, bookmarks or whether you are going to purchase it, we learn from all of that data ultimately creating what is perhaps the biggest least understood mode for Pandora, which is the algorithms.
When you look at what Pandora is doing in terms of mobile connectivity, we are one of the few leaders. When Pandora launched on the iPhone in 2007 that forever changed the trajectory of Pandora. We have ceased becoming simply your turn it on, on a Monday and turn it off on a Friday work music solution to becoming part of your everyday life. When you look at the amount of time spent with Pandora, Pandora engagement is tremendous. When you look at how that has changed over time , you see that nearly 81% - sorry, 79% of our usage comes from the desktop environment, whereas – I am sorry, 79% comes from the mobile and other devices environment, whereas 21% now comes from our desktop environment. That makes us one of the few mobile ad providers of this tremendous scale. And that’s translated into tremendous revenue growth as it relates to mobile.
You can see the pie here as it breaks up between some of the other notable peer groups such as Twitter, Millennial Media, Google, Facebook, Pandora is really leading the way here in terms of mobile revenue, but oftentimes, we stop at that. We don’t really discuss of what’s next. When you look at Pandora, Pandora is really on the forefront of what Doug and others are going to be talking about and writing about in the next 2 to 3 years, which is really the connectivity of other devices, anything that could have a computer chip in it that could essentially link to the internet. Oftentimes, you hear that term the Internet of Things. And so this site actually goes to show you if we were to breakout some of the hours that are streamed through other’s devices, you see that Pandora now has roughly 13% of our listener hours are coming from devices that are outside of smartphones, tablets and desktop PCs. And actually everywhere that Pandora streams ultimately allows us to achieve our goal of bringing the disruption to the internet. Oftentimes, you have advertisers that use Pandora to sell their own products. This is own ad that will hit up from VIZIO right around the time of CES that goes to show you that these are almost Pandora ads, but they are being paid for and delivered upon by our partners. You can turn the volume up.
So that’s the VIZIO one and then we have one final one here from – that a lot of us – I got in the Chicago yesterday I saw this playing. I have to put it up here when I talk, but it’s the – essentially it’s the Honda Accord holiday version which I proudly will have to skip. But that version actually goes to show how Pandora – they use Pandora to sell the new Accords that are coming out. The Accords are actually the first fleet wide car that will include Pandora within the device itself fleet wide. Whereas it took Sirius XM nearly 10 years to get into roughly 68% of the cars being hitting the U.S. auto fleet. Pandora within – under a three-year period will now be in nearly a third of our models hitting the showroom for this year with more to follow next year. We have nearly 100 models, I was just at the L.A. Auto Show a couple of weeks ago in Los Angeles and it’s amazing to see. We can’t even keep up with the number and so we will actually be updating that at the consumer electronics show coming up here in January. But ultimately Pandora given that half of radio consumption takes place in the car we want you to be able to connect through the car as well.
Now currently those native and DAS systems work in a manner that ultimately uses your smartphone and the data plan through your smartphone is it’s tethered. The command and control moves to the UI and the infotainment system of the car. For those of you who are worried about your data plans fear not Pandora streams at 32 kilobits per second, which ultimately means you have to stream nearly 70 hours within your car to surpass even a gig worth of usage. So we have proprietary technologies we developed that often times we get close to 40,000 emails from users a month that our listener support team handles. Many of those emails actually are quite flattering or complementary, some obviously lost pass codes, but my favorite that we get are can you teach the wireless carriers how to not drop my call because you are awesome by not dropping Pandora. So there is a proprietary technology that we are very proud of and that make the experience very, very clean.
When you look at the opportunities that we are essentially tapping into, the $427 million that Pandora did last year virtually half of that came from the last bucket here which is about $22 billion market excluding search, which is the digital media interactive side, so the traditional internet side. When you look at the other area of category we discussed that Pandora is on the forefront, it’s the growing – rapidly growing U.S. mobile advertising marketplace. That last year was about $3.5 million, this year it’s gauged by eMarket to be about $7.7 billion, ultimately growing north of $12 billion in the near future, so very fast growing market where Pandora drives more than half of our revenue already from that.
But a significant opportunity for us that we have invested in the near-term and one that we have talked to some to a great deal about over the last 12 months is really the local ad opportunity that’s the U.S. radio ad market. The reason this interests us so much is because it is ours to own essentially. None of the other digital media interactive players can really tap from this $15 billion pool of money. Ultimately because Pandora is the only one that really has legitimate access to our auditory abilities, that’s also why our mobile monetization is arguably superior to the most other web priorities is because as we monetize from the radio side of the world that has inherently been mobile since 1930. And so as such we have had a strategy that now Pandora has essentially been ranked the number one radio station in most major local markets throughout the country. There are 275 markets, that Triton looks at and Pandora is by far the leader in most.
When you look at our local market strategy, it’s been fivefold. You look at what we – when to achieve by allowing unabated growth of listener hours. So one of the initial criticisms as we went public was that Pandora was a victim to its listener hours, we weren’t. We were consciously investing in the growth of our listener base to achieve undisputed number one market leadership position in Chicago, in Los Angeles, in New York. The second kind of key puzzle piece to that strategy was to get that measure. Arbitron was not about to necessarily validate Pandora at the time simply because it would be biting the hand that fed them, which was a broadcast radio. So they had a bit of a conflict of interest. And so we had a leader that emerged from the forefront Triton and Triton essentially has become the namesake in terms of the internet radio measurement. With Triton we are able to advance into the ad buying platforms known as STRATA Mediaocean they are the buy side platforms that radio has been historically bought from. So our goal was to basically sound, act, and talk like radio. And Pandora today does that. We are side by side our Arbitron data. We are ranked if you were to look in Chicago, which I believe I have an example on. You would see WPAN ranked next to Z100, Clear Channel station.
And you would see our AQH rating you would see our cume rating. All of that is radio speak and all of that ultimately allows us to tap the dollars that are $15 billion worth that really have had no alternatives. With that we give radio buyers attribution, measurement and ultimately calls to action should they want them. This is leaps and bounds ahead of where radio or what radio has provided traditional broadcast advertisers. And so now Pandora has expanded – has rapidly expanded our sales team. We are now in 29 of the top 50 markets with roughly 80 people in those markets. Our cadence of hiring usually is, we hire heavy in the first half of the year and ultimately kind of absorb, ramp for the second half of the year, which is traditionally the seasonally strong advertising period. And then we hire again going into the first half of the next year.
We have gotten a very large kind of blue chip local advertising customer base across the board. We obviously have tremendous big national brands, but we also have local advertising you might see Fry’s in California, Shane Co. California, you might have the cosmopolitan in for Vegas. So we are now taping after that very, very lucrative market. When you look at the CPMs associated with that hyper local market as we call it, they are anywhere from 2 to 2.5 times that of the audio CPMs you would get otherwise. So for us it’s a clear priority, one that has immediate ROI.
With that, I will probably stop. I will leave our target model up here in case some of you are unfamiliar with that. And Doug maybe we can go to some questions.
Doug Anmuth - JPMorgan
Yes, great. Thank you, Dominic. So let me kick off first then you guys obviously feel free to jump in. You mentioned Dominic the buy side platform integration on STRATA and Mediaocean, if you could give us an update on where you are there sort of obviously it’s already rolled out, but what you have seen in terms of advertisers adopting and moving over to you guys since those platforms now that you are on their sort of leveling the plain field and how much more progress is there to make on that front?
That’s great. When you look at STRATA and Mediaocean, first of all these are systems that haven’t changed in quite some time. It wasn’t Pandora pushing to get into the systems, it was actually very much the consumer point i.e., the advertisers. And so for us that was definitely a benefit because the systems when you go through the transaction outside of the systems rather it’s very arduous, it’s a process that can take anywhere from two to three days. And it’s quite user intensive on our part and the part of the advertising – radio advertising wire. When you look at being integrated in these systems what it’s allowed for us to do is really go after the hyper local, which transact on a very rapid basis. So you might have – it might be Thursday and the local auto dealership might realize that they need to drive feed into the dealership because the inventories are back, might be backing up and it’s near the end of the month. Because of the integrations into these systems and STRATA and Mediaocean together account for roughly 80% of the buys that take place of the $15 billion.
The progress there is very promising and has been quite successful. We haven’t broken out any specific numbers, but what we have said is we have essentially moved all of our audio advertising from even though existing business we had are now transacting through these systems to free up our sales reps to be more efficient honestly. And the only barriers still left aside from inertia, because we do go, have to go in and say this is WPAN and why our measurement or AQH of 1.2 and what that means, because a lot of radio advertisers haven’t seen scores that high in a decade. So it kind of wows people to some degree. But I would say that the only perhaps point of stickiness is that not everybody, not at all these systems are SaaS-based. So there is probably about half that are client server based. So there is some element of just upgrades that need to take place. That’s really the only inhibiting.
Doug Anmuth - JPMorgan
Okay. And then, I mean, obviously the integration is to a large degree about moving friction in the process for advertisers, one point of perhaps friction, I mean, you obviously have Triton measurement, which is of course accepted in the radio industry and it seems like now with Nielsen Media having acquired Arbitron, there is perhaps greater potential here for them to measure internet radio. What are your thoughts there and the likelihood of that happening going forward?
Yes. As I mentioned prior, we definitely view – we are eager for cross platform measurement. There is nothing but goodness that goes with that. That being said, Triton has been at the forefront of internet radio measurement. They were the first to see where it was headed. They become the dominant player. And so we are very thankful for that partnership with them and they have done a great job to help us educate ad buyers as well. Regarding Arbitron, I think with the acquisition of Nielsen, it does take away the challenging business model, conversion that they perhaps might have to make and it’s very difficult to do that as a standalone company. Under Nielsen’s brand, it might be a little more painless.
Doug Anmuth - JPMorgan
Go ahead. I will repeat your question.
Yes. So let me remind kind of the group one area we didn’t talk about, there is always three topics I without a doubt spend, you can characterize every question into its competition, monetization and content cost. On the content cost side, Pandora operates under a compulsory license under Section 114 of the Digital Millennium Copyright Act. Radio historically has operated under a compulsory license. It wasn’t very effective or efficient for 1950’s independent radio station to go to capital records in LA and try to license the music it just didn’t work that way. So, one of the progressive components of the DMCA aside from kind of cracking down on the piracy that was known as Napster was also to define what and to transfer the compulsory licenses to internet radio.
So internet radio is defined as you cannot hear a song on demand, you cannot skip more than six times in a given hour, you won’t hear given artists more than four times in a given three-hour period. And if you operate under those constraints or those rules, you qualify for the federal license structure. As such, the rates were set every five years by a governing body known by the CRB, the Copyright Royalty Board. It’s a three judge panel that are instructed by law to determine where a willing buyer, willing seller meet to form a market rate transaction. That process will be taking off in January of this year. It’s a two-year process. It will be completed two years from this month. And it’s a federally governed process. Sirius XM, for example, went through it for two years. And their rates were set for the next five-year period last December.
Doug Anmuth - JPMorgan
Dominic, can you – there was a lot of talk, I mean, this space in general, you have seen multiple competitors, obviously you put out the numbers in terms of share of just internet radio, but we are seeing a little bit more in terms of stuff that’s come out of Apple in the last couple of months with iTunes Radio, Spotify is sort of in the other 20% bucket in terms of on-demand music, but there is obviously more potential and sort of talk in the press about them doing something, which potentially blends a little bit of on-demand with their existing internet radio product. Can you talk about your thoughts there?
Yes. When you look at the – again, the competition for us, it’s always been a question of Pandora’s encounter as a public company 2.5 years now, but it’s one that we faced for literally close to 8 years. So when Pandora made the ultimate pivot moving from just to simply music recommendation engine into modern day Pandora back in 2005 timeframe, there were very large players. There was Yahoo!, AOL and Microsoft. I actually remember an university using Launchcast, which was I think the dominant player. But Pandora came along to do it differently. The Music Genome definitely was a methodology on how we differentiated, which made the discovery component so much dramatically better than the static playlist component that Launchcast, Yahoo!’s Launchcast provided. And then adding in the personalization technology, that was perhaps kind of the beginning of the truly secret sauce in terms of the algorithms. Since then with the digitization of music, you have had lot of on-demand players. They range from Rhapsody, MOG, Rdio, Turntable.fm, Spotify, iTunes, YouTube. Those all are in the 20% on-demand bucket.
And then when you look at tuning a radio, you have a number of small players, I think the biggest pure play has 3% market share. And then clearly, you have the incumbent radio kind of old guard trying to protect their flank by having products. You have iHeartRadio. CBS has Last.fm, which has effectively been shuttered. And so they are trying to come up with a way how do they have – it’s always the innovator’s dilemma of creative destruction, how do they eat their own market share, because it pools away from their revenue streams knowing that the future of radio is through internet radio. Now, specifically as it relates to kind of the on-demand vendors, I think the best analogy I can use is oftentimes as on-demand vendors, whether it’s Apple or whether it’s Spotify, they use radio as a feature. They use radio as an off-ramp to take you to another juncture. And so for Apple that could be for you to buy music. Ironically, Pandora was actually one of the top referrals of own music purchase both to Apple and to Amazon. For Spotify, it’s more of a reflection on filling up their subscriber pool. Ultimately, some of the moves that they have made recently are more of a reflection on kind of their subscriber pool and perhaps slowing conversion rates. And so they have to turn on other valves.
With Pandora, that’s not our goal. Our goal isn’t to take you to another venue as a consumer. Our goal is to give you the best internet radio experience whether it be ad free, if you don’t want to hear ads, you are welcomed to become a subscriber, but we know that the marketplace itself is not predisposed to paying for subscriptions. That’s why our model is predominantly ad based. That’s why, roughly 80% of our revenues that we are going to do this year will be ad based. We do like the subscription component. And for users that don’t mind paying $3.99 a month, we are very happy to have that as an alternative. And there are benefits that come to that such as higher streaming quality should you want it, certain customization and certain content that you get, but fundamentally we know that in order for this to be a mass scale it needs to be free ad supported to the consumer.
Doug Anmuth - JPMorgan
Okay, great. The question just on the international business, so you are in New Zealand and Australia, I was hoping you could comment, give us a little color on how those markets are doing and then also talk about the potential for moving into other geographies and what the sort of restraints are there around royalties in potentially going to those markets?
Yes. And to help give some context for those who haven’t actually been following Pandora, we entered into Australia and New Zealand out of beta mode literally one year ago today or close to today rather. And by doing that we enabled Pandora available immediately on all access points, so mobile, tablets. Now there are actually autos they are rolling out in Australia and New Zealand, Holland as I believe the first company to roll Pandora integration now. And Doug’s question is timely as Australia starts to wake up here in the next few hours we will be making the announcement the we have reached our first million users in Australia and New Zealand that may not seem like a dramatic amount, but for – in Australia its 24 million and New Zealand it’s 3 million. So for – it’s a sizeable achievement for just one year. It’s actually as you would expect our roll out there population adjusted is going at a faster basis than in the United States.
Also of note is we will start to roll out on advertising in Australia and New Zealand as well. We have an ad team that has been assembled out there under very smart person who helped to launch Microsoft into Australia and New Zealand. So I think we are setup for a great success there. The rate structure that we set there are similar bodies that exist in Australia and New Zealand in the way that they exist in the U.S. So of the royalties we pay two types of royalties in the U.S. We pay one that’s the performance royalty, that’s the vast majority of our cost of content. That’s paid on per track, per play basis. It’s about 92% of our cost of content. And then we pay a music publishing piece, which is for the lyrics of the music and that’s a percent of revenue.
Similar bodies exist like that throughout the world. In Australia and New Zealand, it’s the similar body to SoundExchange would be (indiscernible). And for the music composition piece would be PPNZ and PPAU which they literally stand for Phonographic Performance Company of New Zealand and Phonographic Performance Company of Australia. It goes to show you should why exactly this industry is for disruption. And the way we look at further international expansion as we look at it is patiently opportunistic in the way that – in a securities filing we did back in July of 2012, we indicated that the rate structure that had been set in Australia and New Zealand was less than 25% of revenue.
And so from new market share, we are very keen on entering because we believe that we can – we want to bring internet radio to the world. What we aren’t so keen on is necessarily paying a per track per play basis that is an odd ball that exists nowhere throughout the world for radio. And so usually radio does pay a royalty ironically not in the U.S. but throughout the world it’s generally around mid-single digit percents of revenue. So when we enter into arbitration or discussions with the local geographies, our perspective is if we can make it immediately value accretive to shareholders as a percent of revenue linking costs as a percent of revenue that makes the most sense for us.
Doug Anmuth - JPMorgan
Okay, are there questions out here? Alright, just wanted to ask you about content, clearly Pandora is based on music, there is also comedy within the application with a lot of people may not even know about, but how do you think about other types of spoken word content going forward and the potential to bring on other things into Pandora and is that content that you would create yourself potentially license, how do you think about that down the line?
Yes, here I pulled upon one of a local comedian, not really local, she has gone national now from Oakland our home base Angela Johnson she does Bon Qui Qui which is pretty funny. So we now have comedy in Pandora and for those of you who didn’t know the way we do it is we have a similar integration philosophy. With Pandora as you can personalize it. So we have comedy analysts that sit there, analyze different criteria based on a particular artist. This one gives me Gabriel Iglesias, Kathleen Madigan, Ellen Degeneres. It talks about who they are what they do you what aspects of her comedy allowed us to pour into the genome and who else might be like her. And so as part of that, we look at new forms of content in the way of how can we Pandorize, how can we personalize it. Today, just to put Doug’s mind at ease, we are not necessarily missing anything from a market segment, from a size perspective, 80% of radio is music, 20% is talk, comedy, sports, news, traffic. So we have the vast majority of what we need to be wildly successful in radio. We haven’t shown any predisposition to spend dramatic amounts of dollars to hire larger than life personalities that sometimes can cause $400 million nor have we really shown a predisposition to go for certain types of sporting content. Generally speaking, that has only been accretive to that sporting group versus kind of the provider of the avenue to hear it or watch it.
Doug Anmuth - JPMorgan
Okay, great. Let’s do one or two more, maybe you can just give us a sense in terms of both from what investors should expect, but then also users in terms of the ad load going forward. You recently made some changes in sort of the format and perhaps the timing, let’s say, of the ads that you are actually showing. Can you give us some color there?
Yes, when we look at the – so first and foremost, we always look at the consumer experiences. We have to make it pristine. We have to make the user experience very easy. It’s interesting, because there are direct competitors of ours that have lot of toggles and switches. And the more complex you make Pandora, the more your congression or your addressable market declines. My 65-year-old mother, God bless her soul, probably can’t do a lot of kind of the toggling or what modem based in right, but she knows how to use Pandora, because it’s simple. We have a concept of what’s meantime to music, how quickly we get music to you. So that’s why the second you hit Pandora or go to Pandora.com, is when you are logged in, you hear music first and foremost. That’s our goal.
A lot of how we are investing in that is taking place in the form of R&D. We haven’t had the gross margin structure prior to our success in – our recent success in monetization to allow for the reinvestment in that growth. So our R&D has been relatively modest kind of in the 3% range of revenue. We expect to grow that to roughly 7% of revenue, so we can continue to innovate on the products. Innovation for us, are not simply features although the sleep button we installed in Pandora few months ago, was widely viewed as an awesome feature. So yesterday, we rolled out the alarm clock. So now we are going to be rolling across all platforms, but we are currently on iOS is the alarm clock feature, so you can setup waking up to beeping or buzzing noise, you can wake up to your favorite soothing spa Pandora station or something. And so that’s how we look at it from an investment standpoint with the user experience. From an ad load perspective, we will never have to get to the level of broadcast radio, which does 13 to 15 minutes worth of ads. We fundamentally won’t. We are already monetizing in nearly more than half the rate of radio with close to one-tenth to the audio ad load, that’s because we have all of the visual space to work with in the way that radio doesn’t. In the car, yes, we will have a higher audio ad load, because we will not have the visual side, but fundamentally, we don’t have to go even anywhere near broadcast radio levels. And I think we have one final question.
So the question was is good enough good enough? And ultimately can it be a substitutionary good that someone can just flip on another service right? And I love that characterization, because three years ago, roughly actually little over two years ago. So in September of 2011, the sentiment on Pandora was such that the competition is barreling at us right. We have just gone public. Spotify had just launched in the U.S. in June of that year and you had iHeartRadio re-launching, I am sorry this was 2011 yes. And so you had iHeartRadio re-launching in the U.S. with if not tens, hundreds of millions of dollars that Bob Pittman has put essentially to make that brand bigger than life. I mean, they do big concerts in Vegas. And at the time I remember most of the headlines were, is this a Pandora killer, iHeartRadio, its good enough, that’s what many of the reviews saying. During the 2 years that had ensued since, Pandora’s market share went from 50% of an expanding pie to nearly 72% of all of internet radio and Mr. Pittman’s market share grew 8.5% to if you look at it Triton today, I think has it around 11.5%, so 300 basis points of improvement for them at the cost of hundreds of millions of dollars. So again, I guess the question is good enough good enough? No.
Doug Anmuth - JPMorgan
Okay, great. I think we are out of time. So we are going to leave it there. Thank you very much, Dominic.
Dominic Paschel - Vice President, Investor Relations
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