Pandora CEO: Spotify Creating Bad Habits

  in Investing Updates / Analysis

Jun 21, 2016

In a keynote interview at Midem 2016, Pandora CEO Tim Westergren took aim at free ad-based streaming services like Spotify, accusing these firms of instilling unreasonable expectations among users that music should cost nothing.What drives me crazy is there is a substantial part of the digital music world that is educating listeners to believe that they can get music for free, and for free on demand, Westergren said. It creates bad habits.Westergren hasn't made many high-profile appearances since returning to the CEO chair of the company in 2016.He previously served as founding CEO of Pandora from 2002 to 2004.Midem, a music industry conference that took place in Cannes, France in early June, offered the CEO a chance to discuss his company's future, its Music Genome Project, and artist expectations over royalties. But the biggest statement of the day came at the expense of Spotify.Westergren said these bad habits start due to the form of unlimited free trials, it takes the form of poorly monetized on-demand services, so you're not really paying the price as a consumer for having that music. And it's not good, not just in terms of the revenue it doesn't generate but it also in teaching bad habits. So that puts a lot of pressure on companies and we're one of them in terms of trying to build a real business.


Westergren said that he doesn't have plans to sell the company at any point and announced that the company is set to unveil a new subscription service that would cost less than the $10 per month paid by current subscribers. I think there's a much bigger audience that will pay less than $120 per year, he said.At the core is the ongoing frustration that many people are able to access music for free. Westergren said that he founded Pandora to help working musicians, and then took direct aim at traditional AM/FM radio for its royalty practices. The CEO claims that Pandora radio stations have helped boost royalty payments to artists.Every 1% of market share that moves over to Pandora creates $60 million of revenue a year for the industry, he said. Westergren hopes that rivals start to shift away from free music models or else it will be much harder to shift consumer behavior in the future. I think the industry really needs to get its hands on that quickly before it gets out [too far] -- it will be hard to get it back in, Westergren said about monetizing audiences that expect free music.The statements appear to be a broader battle between Pandora and Spotify, which argues that its model is superior and will do more good for the music industry.We have proudly achieved these payouts despite having relatively few users compared to radio, iTunes or Pandora, and as we continue to grow we expect that we will generate many billions more in royalties, the company writes when describing its influence on revenues to the industry.


Westergren's statements point to the broader frustration of current royalty payments for artists, musicians, and other rights holders. That frustration was especially evident in a New York Times article that featured artists' disappointment with YouTube. The online video site accounts for a massive share of free-streaming on the internet, another outlet that fuels expectations of cheap or no-cost music. Musicians are exploring ways to embargo new content from free-streaming sites, a move that would push users away from the traditional free models and streaming sites. One proposal would be to not release music that could be uploaded to YouTube for at least six weeks. However, challenges exist to this mission as users still find a way to access free content and disseminate it. Musicians are also taking direct aim at the 1998 Digital Millennium Copyright Act (DMCA) that shields YouTube and other streaming sites from any liability when users post intellectual property onto their servers without an artist or copyright holder's permission. A lobbying effort is being pushed to hold sites that allow users to infringe on copyrighted material more accountable. On the ground where Pandora and Spotify operate, it's clear that online streaming channels are looking for new ways to obtain exclusive rights to music. At the very basic level, increased royalty payments will help fuel an increase in artist interest, as these firms stand to benefit from any embargoes on content on YouTube.For too long, the music royalty business has been marred in inefficiencies, making it very difficult for musicians to receive proper compensation for their works. But radical changes are coming as new platforms help establish more liquid markets that benefit both musicians and investors.