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Pandora Media, Inc. (NYSE:P)

2014 Morgan Stanley Technology, Media & Telecom Conference Transcript

March 6, 2014 11:45 AM ET

Executives

Brian McAndrews - Chairman, President and CEO

Analysts

Scott Devitt - Morgan Stanley

Scott Devitt - Morgan Stanley

Good morning. Thanks for coming back for day four and it is my pleasure to have Brian McAndrews, CEO, President and Chairman of Pandora on stage with me. Brian joined Pandora in September of last year, maybe best known for his time at aQuantive where he served as President and CEO for eight years, through the company's $6 billion sale to Microsoft in 2007. Brian then served as Microsoft's SVP of Advertising and Publisher Solutions before joining Madrona Venture Group in 2009 as a partner focusing on early stage companies. So, Brian, thanks for joining us.

Brian McAndrews

Thanks, Scott. It’s good to be here.

Scott Devitt - Morgan Stanley

I have a plenty of questions, but given that you all did release some information this morning, maybe we start there and we are going to some longer term more important things. You announced audience metrics in terms of the growth in user base and growth in listener hours? And then you also announced that in June of this year you are going to stop releasing those. So can you just walk through that and give some context?

Brian McAndrews

Sure. Yeah. We did release our monthly metric and our listener hours were about 1.5 billion, up 9%, our unique listeners was 75.3 million, up 11%. And so we’ve said, obviously, with the lot large numbers we are starting to see some growth slowing.

This part of the year is also a little unique in that last year at this time, it was right before we put caps on the listener hours and then began managing our listener hours that, through managing skips and time limits.

So last year we had a unique situation with our growth that we actually we were working to slowdown and so I think we -- as we go into Q2 and Q3, we think we will see reacceleration in growth from what we saw in February.

In terms of the no longer doing monthly releases, we’ve said for awhile that the reason we originally did them was because we wanted to allow our advertisers to have that data because there wasn’t enough acceptance yet of third-party data that was measuring us and allowing them to have a data they needed to make advertising decisions.

And now with Triton announcing this week that’s the Media Rating Counsel has approved their local rating. We feel our milestone has been met and now there is dispute about the validity of those -- of that information, so that information will be available. So we will still release quarterly. But that was the whole purpose for releasing monthly and that reason has gone away.

Scott Devitt - Morgan Stanley

Okay. So back to the top and starting with, your decision to though even with Pandora for six months now-ish and what led to the decision to join and what has been the biggest surprises in the first six months?

Brian McAndrews

Sure. The decision to join really, my relatively brief time about four years in the venture capital world, I learn that at least Madrona and I think other firms look at three basic things, very important things, when they are elevating an investment opportunity. One is the size of the opportunity, two is the, differentiation or quality of the product or service and three is the quality of the team.

And so that’s kind of lens I used when I look at Pandora. First of all, I have been a listener for years, loved the product and loved the service. So I was and as you may know I worked in television for almost the decade. So I do have some background in entertainment. It’s always been interest to me.

So, I was, I -- looking at the opportunity, we think it’s a very huge opportunity, $15 billion radio in the U.S. alone growing to $17 billion 2017, $22 billion-ish in video and display, digital advertising and then another $12 billion in mobile and when you kind of put all those together. It’s a really, really big opportunity for us because we play in all three of those market opportunity.

So really big opportunity, great product, obviously listeners love it and one of the most gratifying things about taking this job is the emails I got at the time and continue to get some people, say, I love Pandora.

So the product is really great. We have invested heavily in the play list technology that through 15 years with 35 billion thumps up and down and 5 billion stations created, just tremendous amount of learning and improvement and it all started with Tim Westerman’s idea of The Music Genome Project which is literally individual listening music and cataloging it. But since then we build 50 plus algorithms on top of that to make it better and better.

So, great, people like it for a reason and so that was the second box that was checked. And then just meeting the teams, the Board, the executive team, the interview process and then, of course, having the benefit of meeting even more people since I joined.

Again felt really excited about a lot of very passionate people who know lot about this industry and are excited to be part of Pandora and it made, what I view as some early smart decisions long before I arrived.

In terms of surprises, the good news is no big surprises and I think I come in with some advertising background in traditional and digital media. I come in with an entertainment background from the television side. I did not come in with any specific radio background. So that’s the area probably where the learning comes in. Steve, this is just learning the radio business both from, kind of, terrestrial side in terms of just the space that we’re in broadly defined and also the internet radio side.

Scott Devitt - Morgan Stanley

Let’s say past 12, 18 months, you’ve dealt with the emergence of potential competitive threats and gotten through this periods at this juncture very well in terms of continuing to maintain growth. You’ve successfully integrated two largest ad buying systems. You’ve continued to be successful in automobile initiatives, continued to explore and even launched in the international market.

So a lot of things and lot of it actually turned out positively in that period. As you look forward over the next 12 to 18 months, what do you think were the three or four priorities that you are focused on where investors can measure you whether it’s some of the same priorities that I just laid out or others?

Brian McAndrews

Sure. I mean -- I think the key priority is, first of all, this continue the positive momentum that we feel we have and continue to support that. We did go through and have three basically strategic priorities for the year, none of which will be particularly surprising but they give you an idea of where we’re investing our energy and attention. One is to continue to increase listener hours and listener -- number of listeners.

Second is to continue to improve our monetization and then the third is to make sure we’re managing our content cost. So those are kind of the broad buckets of where we are focusing in terms of the listener and listener hours that you alluded to, some of the things that we have done there. Clearly, auto was the huge opportunity for us.

I think it’s important for us to understand it. It’s a slow ramp. We are out ahead. We are in 130 models of cars integrated in. This year Volvo and General Motors have announced they are coming out with connected cars and we will be part of both of those. So we feel like we’re in a great leadership position there.

Having said that, cars come out, models come out every seven years or so. People make purchases. So it takes a while for that to all happen. And there is -- it's kind of stated approach where obviously some people are just listening on their -- listen to their mobile device. But in terms of integrated car, the way we think about that is, your phone is the brain if you will but your car is the control. It thumbs up, thumbs down, station change is in the car and that’s we now have 4 million activation in that respect up from 1 million a year. So growing rapidly but still lot of room to go.

And then the third phase if you will is the actually connected cars that I alluded to where the car is the brain and the controls. And that’s what Volvo and General Motors are coming out with this year that we will be part of. So it takes a while but that’s certainly a key -- a key opportunity for us in terms of continued growth.

Scott Devitt - Morgan Stanley

There is a comparison that’s made with your business back to the online video industry. And I think even at one time we referred to you as Netflix of radio in our report. And the cost structure of this industry is very different. Video is a fixed cost structure business in terms of the requirement to acquire content up from before you get subscribers. Radio is more variable cost.

And so how do you think that affects the longer term competitive dynamics in the industry in terms of the ability for players to be in this -- in the business without deploying a lot of capital and benefiting over time from user basis in terms of large platforms like Android and what Apple has and few others.

Brian McAndrews

I think it’s a barrier-to-entry for use. It’s a -- obviously content cost or significant cost for us, 53% of our revenue last year. So, it’s a significant barrier for entry for any new players that want to come in and I think we see that obviously is positive, obviously that’s a cost that over time we want to manage and we want to try to bring down that percentage over time. And we think as we grow and scale and continue to write significant checks to the artist labels, publishers and et cetera, that we will have that ability to do that. So, yeah, it is a different model. We feel like we have tremendous experience in working with it and tremendous opportunities with our continued scale and growth.

Scott Devitt - Morgan Stanley

How do you think about -- you went through a period, I don’t want to put words in your mouth but just our perception of where the inability to appropriately monetize mobile led to a willingness to constraint usage and that seems to have turned the corner in perhaps six months or so. And it now seems that if you are going to be more aggressive potentially in terms of marketing usage, can you talk a bit about the channels that you use and how you think about mobile growth over time and the ability to monetize it?

Brian McAndrews

Sure. Yeah, it’s absolutely true that as I mentioned before a year ago, we were actually constraining listener hours because of the fact that we weren’t monetizing it effectively as we are now. We were -- a good problem to have, I guess we were growing very rapidly but not a situation any business wants to be in where you are actually deterring people from using your product. So those days, fortunately, we believe are behind us and we are now monetizing better and so now we are looking at what are opportunities to grow because we’ve gotten to a point where we’ve turned profitable and we are trying -- investing more money back into the business.

We have an opportunity to spend money on marketing, which we’ve never really done much before. We’ve certainly done SCM but we haven’t done much. And we are not talking about a Super Bowl ad or huge budgets. So we are talking about an opportunity to find ways to engage listeners more, continue to have acquisitions but also focus more on engagement and that’s taking place in different ways. We’ve already done some advertising for those that use the service may have seen or heard ads, now playing you kind of a new piece of creative, we created that we have been running on the service. And we look for opportunities with brand partnerships and other ways to advertise outside of our own platform. We’ve got not huge increases but definitely noticeable internally increases in terms of what we intend to do in that arenas.

Scott Devitt - Morgan Stanley

Okay. And could you talk about the differences in, now within integrations into Mediaocean and STRATA, the buying process is different than it used to be? Can you talk about the effects in terms of the way the advertisers are behaving that are purchasing through these connections relative to the manual ones historically? How it has affected size of advertiser, how it has affected sales force sufficiency and otherwise?

Brian McAndrews

Yeah. Our integrations to Mediaocean and STRATA have been really significant, so like many things in this industry, they take time. You don’t just flip a switch and say we are integrated. And so we have seen benefit over time and basically it allowed people to -- it allows people to do side-by-side comparisons of us and other choices they have in terms of what advertise and make decisions and it used to be a work around, kind of manual process. Now it’s much more automated and part of the normal workflow and we estimate that Mediaocean and STRATA are about 80% of the $15 billion market buys that go through there, so it’s significant.

And I would say again, the same thing with local. It’s not an overnight. Certainly, there are in local and they help us there. We are hiring more sales people, we are growing the number of people we have and it’s kind of a gradual thing. But I think each one of these milestones is a key positive thing for us. And I guess I was going to say, just like the Media Ratings Council also coming out and approving trade with local will help tremendously as well. It’s just another step that we are easier to compare to others alternatives they have.

Scott Devitt - Morgan Stanley

You are probably not well -- probably not well understood in terms of what Pandora does on the consumer facing side and with musicians in terms of driving discovery. I know I get emails from time to time from Dom, notifying us of any events that you are doing, unfortunately, I tend to go to bed around 9 O’clock at night. So, I can’t attend but John and my team goes to pretty much every event. And so, I know at South by Southwest next week, there is multiple events. Talk a bit about the way, giving the size and scale that Pandora has now that you do and are able to drive discovery.

Brian McAndrews

Sure. We are very proud of the way that we connect our listeners to our artists I should say to their audience and listeners to the artists they want to connect with both established and also new, and we are big on discovery. We recently opened up our submission process for independent artists, including labels and also self-representative if you will. And we’ve seen like a 3, almost a 3X increase in the number of submissions. And we play in a typical week I would say 100,000 artists on Pandora, and we believe that’s about 80% of those don’t play terrestrial radio. So, tremendous opportunity for discovery.

And what Scott -- what you’re alluding to is some of the things that we’ve done in terms of sponsoring or helping pull new artists often, not always brand new in forums for -- in concert forums. So we did an event with Celine Dion last year where we emailed people who had Celine Dion stations and gave them an opportunity to see her perform. That was in New York. I was back in New York at the Super Bowl timing and we did an event with Bud Light, with Budweiser Bud Light, the Bud Light Hotel where we were partners with them and Imagine Dragons and Walk The Moon artists performed. And then at South By Southwest, we will have -- I think it’s 35 artists where we helped people discover their music and we call it Discovery Den and people have an opportunity to hear from them as well.

Scott Devitt - Morgan Stanley

One more for me and we’ll open up for questions, just wait for a microphone to come to you, just to make this kind of interesting because Clear Channel presents after you. There was a commentary on their fourth quarter call where an executive said and I’m paraphrasing, but it’s mathematically impossible that Pandora’s audience scale would make it the number one station in any top radio market and that he thinks that Pandora would be 17 or 18 in New York City. And so I think you have a lot of data about Pandora’s scale in each markets, and is there anything that you can share specifically given that commentary about the New York market or otherwise?

Brian McAndrews

Sure. I think that comment was clarified by the Nielsen in the press. So I -- and you can ask I guess your ex-panel about that if you want. So I don’t think that -- I don’t think anyone stands by those comments anymore, but I could be wrong. But certainly we don’t think they make sense. We have data and Triton again now says that our average quarterly hour rating in New York is 1.1 against 18 to 49. And if you talk to agencies they will tell you that makes us number one.

Media Audit also says that we’re number one in 12 to 15 markets, top 15 markets. So we stand by those numbers. Again, I think the benefit of this MRC approval of Triton that came out this week is that, I think a lot of these questions will go away I think to people who want to challenge the data, will find it much more difficult to do because Media Ratings Council is seen as kind of the seal of approval that Triton is measuring correctly both on a national and local basis.

Scott Devitt - Morgan Stanley

10 minutes left. Questions, there is one up here in the front.

Question-and-Answer Session

Unidentified Analyst

Thanks. So The Echo Nest was acquired this morning by competitor that service powers recommendations for a lot of your competitors and other on-demand services. Do you think that makes people think that recommendations aren’t a commodity and there is actually a lot of value in the things like the Music Genome Project? And if you were and some of your competitors choose how would you feel about using The Echo Nest on an ongoing basis now, now that you know that it’s building the data asset for a competitor?

Brian McAndrews

Yes. So a lot packed into that question. First of all, in a broad sense, we compete with a lot of players, who are in the music business, because if you are listening to X company, you’re not listening to Pandora. Having said that, we do see ourselves more positioned against terrestrial radio and free and ad supported models. We do have subscription model as you know, so that is really for people who don’t want to -- who don’t want the ad. We don’t spend a lot of energy driving people.

I mean, we certain advertise our subscription model as an opportunity, but our goal isn’t to drive all our people to the subscription model. We really believe the bigger opportunity is free. So when you refer that to competitors, I would say in that -- it should be heard in that context, because Spotify who you’re referring to bought Echo Nest is really primarily in the on-demand space, a number of the players not all that you use, I think that’s also in the on-demand space.

I guess if I were a player and a competitor of mine purchased something that I thought was important to my business that would certainly be a concern of mine. Again we fortunately don’t have that concern. We obviously do it ourselves. We feel that again this company has been around helping a number of other players in this space for long time and this got early alluded to, we felt good about the way that we manage to continue to grow in the face of the number of new player. So we don’t see this as a significant development for us. Good question to ask others in space, whether they should be concerned as you said they are helping to build the database for someone they probably view as a competitor.

Scott Devitt - Morgan Stanley

Brian I have a question over here.

Brian McAndrews

Okay.

Unidentified Analyst

Hi. You mentioned Brian that the radio advertising 15 billion going to 17, big opportunity, can you talk about how you look at national agency piece of that versus locals about 75% to 80% of that so most of the money is still little, perhaps less sophisticated buying deals done at restaurants on napkins. So how do you see that opportunity when you compare those two and what are you guys doing internally to sort of position yourself to take a local dollar?

Brian McAndrews

We see it as a very big opportunity for us and we have shifted more and more towards local both in terms of the disinvesting in our sales team. I believe we are in 32 markets now. So just continuing to invest in our sales team and do what you are talking about the education. Now the good news is we are not creating radio, we may be doing what we believe is a better model of radio where you can better target ads, you get better segment, we have more data, we can personalize.

So we think we are a better version, but radio obviously has been around a very long time. So whether it’s the mattress store or the automobile dealership or whatever they know that they bought radio. They are very familiar with the effects it has for them. So we are not selling the whole concept. We are selling what we believe is a better version of that.

So again as of all these things it takes time but we see a big opportunity there and there are higher CPMs and local than there are national. So while we still do national advertising, we do see the big opportunity and the reason why we are investing heavily and growing our sales force is for exactly that reason.

Unidentified Analyst

And if I could ask a follow up, we had Liberty Media present earlier this week, talking about the Sirius, obviously they have got deep OEM relationships. How do you approach the relations with car companies, do you view Sirius and Pandora as sort of two competing services in the dash, do you see it has audio entertainment, lots of room for all of it to grow, how do you position your products versus their, or does not even see them as really that relevant to what you are trying to do?

Brian McAndrews

Again, in the broader scheme there, it is somewhat relevant and again, if you are listening to them you are listening to us at the time and vice-versa. On the other hand, we are two pretty different offerings. Obviously there is subscription offering or free. But I think when we go to auto companies, we don’t really position ourselves against someone we sort of say, we have 200 million plus registered users, we have 75 million plus monthly uniques.

We should be part of your listening experience. Obviously, it’s good for us and then nearly half of all radio listening happens in cars, so we believe it’s good for them as well. And I think, for people who watch TV, when you see there are many automobile ads that invoke us and in the Super bowl and not just automobile, consumer electronic devices. We don’t pay for those. I mean, that's where they see that as a benefit to the consumer, to their consumer, the Pandora is something that is going to be part of their experience. So that's how we think about it.

Unidentified Analyst

Brian, I have a question on content costs here?

Brian McAndrews

Okay.

Unidentified Analyst

Without getting in the weeds, can you just go into how has your, as you get larger your content cost actually go down, I think and I assume there is going to be another panel review of content cost in the industry-wide in the near future? Where is that coming from?

Brian McAndrews

I am sorry, is it over here.

Scott Devitt - Morgan Stanley

It’s over there.

Brian McAndrews

Yeah. I can. Thank you.

Brian McAndrews

Yeah. So, the question about, there is a CRB process that is starting that is staring Web 4, that started at beginning of this year. It goes through this year in terms of people weighing in and giving opinions and then the rulings come out at the end of next year. So we are participating in that process actively. The last time it happened, we were not active participants and lot has happened since then obviously, while still very young and growing and the market is a little bit more mature, a little bit easier to understand, more things have happened, more developments in the market. So we’re hopeful that all those things will -- will help. The judges ultimately make a decision that we find favorable. Having said that this is an arbitration process, we can’t possibly predict the outcome but we are involved and will be making our case. I may have missed the first part of your question?

Unidentified Analyst

As you grow, your content cost come down, isn’t the metric as such that you reach the certain part of your sales. I can’t remember what the metric is in fact?

Brian McAndrews

No, that is correct. Now obviously that assumes that we don’t make deals where they don’t come down or where arbitration comes down in a way that continues to be the case. But currently, as we continue to monetize, that’s correct, as our monetization gets better, the percentage of revenue that we pay in royalties should go down and has gone down with 60% in 2012 and 53% in 2013. But again that -- over the long term that’s obviously the goal. We’ve stated a long-term goal trying to get to 40%, our medium term goal. But obviously it will depend on what happens in terms of royalty either arbitration and decisions or negotiation.

Unidentified Analyst

When you first launch -- when iTunes radio first launched a few months ago, you talked about that impact on your listeners and listening hours coming more from the less committed listeners, I guess, the ones who have fewer hours listened. Can you give us any update on that as iTunes radio has been out little longer. And also any update you can give us on what do you’ve seen since Spotify, I guess, loosened the reins little bit on restrictions on mobile, what impact does that had on your business?

Brian McAndrews

Yeah, it’s hard to tease out specifically what factors impact what. As we talked about, we grew 9% in February. Again we hope to see some acceleration for that in the next quarter as I talk about the comparison to last year. Having said that we’re still growing, the pace has slowed some, is any of that competitive? It’s really hard to know.

The reason we specifically could address iTunes radio, it was the first time that our active listeners actually went down, went down 2.6% the month that iTunes radio launched. So that was seen pretty clear to be a cause and effect there. And then our research indicated as you said there were people who were less committed listeners which make sense checking out iTunes.

So again, if you’re listening to services, that moment you’re not listening to us. So it can’t have an impact but it’s really hard to discern exactly what the impact is. We’re happy about it that our growth has continued. We’re now larger than we were before iTunes radio launch. We’re larger than we were before Spotify introduced their new offering -- their new free offering. And again the Spotify offering and free to be clear is not what we do, it is an offering that -- it’s the kind of study to understand that allows you to do certain things kind of a shuffle type approach.

And obviously they think it’s a good thing to help. So the funnel for them because I think their real goal is to get subscribers. I mean Daniel Ek has publicly said we don’t compete with Pandora. We don’t think we compete with Pandora. So their goal is really to get subscribers. So they’re finding different ways to bring you into a free environment to be the funnel to get you to subscribe it. As I said we don’t have that kind of funnel, if you want to subscribe, we’re happy to have you subscribed. But if you want free, we’re equally happy because that’s really where we see the bigger opportunity.

Scott Devitt - Morgan Stanley

We’re out of time. Brian, thanks for coming. Cue the Alicia Keys. We are good.

Brian McAndrews

Thank you. Thanks very much.

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