Spotify vs. Pandora: The Battle for Connected Customers

Filed Under Mindjet

Spotify vs. Pandora The Battle for Connected Customers
Pete Hunt

by
April 23, 2012

Grooveshark, Jango, Last.fm, MOG, Pandora, Slacker, Spotify and other services are slugging it out for streaming music supremacy. A knockout blow is unlikely, in large part because the major record labels would rather keep multiple competitors in the ring, duking it out for catalog access—at least until the labels can maneuver into the delivery side of the business themselves. But even if one company doesn’t win decisively, it’s rather more likely that one delivery model will dominate.

The clash between streaming titans provides insight into the way connected customers prefer to receive digital content and suggests emerging best practices for providing it.

Although each service offers distinct interfaces and modifications, they can broadly be broken down into two categories: personalized experience and comprehensive selection. Jango, MOG, Pandora, and Slacker specialize in user-created “radio” channels that intuitively generate upcoming songs based on your endorsement of past selections. Grooveshark, Last.fm, Spotify and others specialize in an all-you-can eat audio buffet. Spotify has more than 15 million tracks you can can choose from, almost all from complete albums. Some of these buffet services also offer radio stations, although they may lack customizable features.

The two standout services are Pandora and Spotify, although Slacker is quickly winning adherents. The two services’ respective strengths and weaknesses are emblematic of the personalized experience and comprehensive selection models.

Pandora is the commercial front end of the Music Genome Project, an ambitious effort to deconstruct and analyze the structure of particular songs to identify common musical attributes they share with other compositions. Pandora’s staff of musicologists break down your favorite Rihanna song into individual components, such as: “rhythmic intro,” “modal harmonies,” “four-on-the-floor beats,” “subtle use of staccato synths,” “prevalent use of groove,” and “joyful lyrics.” Pandora then reverse engineers this information through an algorithm to suggest other songs you might enjoy based on a small music sampling. If you tell Pandora you like Vogue, the next three songs might be Can’t Get you Out of My Head by Kylie Minogue, Telephone by Lady Gaga and Shake by Little Boots (below).

Personal music preference is seemingly so subjective a concept as to defy mathematical deconstruction. Part of the fun of Pandora, then, is seeing how often the Genome algorithm is up to the challenge of deciphering your musical identity. It can be thrilling—and flattering—when the next song really does match up with your music tastes. But you’ll likely feel deflated when the Eagles pop up after all the effort you put in “liking” obscure 70s psychedelic songs.

Pandora’s artificial artistic intelligence brought users rushing to use the service as word spread of its uncannily accurate selections. It was—and is—an excellent way to discover new artists and tracks, all downloadable via iTunes and Amazon links. Pandora further capitalized on its success with a popular mobile app, and even IPO’d in June 2011. Its “cool factor” market niche seemed secure.

But then came Spotify, an unexpected contender from Sweden.

When the service debuted in the United States last summer, after several years of continued growth and success in Europe, many business observers questioned whether there was room for yet another music service to enter the US market. Their concerns were not without merit. The US already had demographic-refined terrestrial radio stations, satellite radio service like Sirius XM and incumbent Internet radio companies. But skeptics overlooked the company’s glowing reviews and thousands of satisfied European users. When the service hit Britain in 2009, the Guardian published an editorial highlighting the service’s ability to “align the interests of musicians and audiences” and give users “free access to literally millions of works – from William Lawes to Lily Allen.”

Indeed, Spotify’s massive library of millions and millions of tracks and albums remains its greatest asset. Spotify notes that it would “take you more than 80 years of non-stop listening just to get through it.” The company has deals with the four major record labels, meaning that nearly every artist from Adele to Zappa is available for your perusal. Spotify today is the massive streaming content library Netflix wants to be tomorrow.

As more users opt for a paid subscription to avoid the endless advertisements that pop up between songs on free accounts, it will likely prove profitable. The company has gained 3 million US subscribers since it launched here last June. About 20 percent—or 600,000—pay for upgraded service, while the rest opt for the free version. In January, Spotify announced that it had 3 million paid subscribers globally.

One crucial component to Spotify’s success has been its close relationship with Facebook. Spotify requires new users to sign up through their Facebook accounts. Users are given the option of using a Facebook Ticker to share their listening selections with their newsfeed audience. Although this is free advertising for Spotify, for some it raises serious privacy concerns about personal information access. Still, the Facebook partnership has been an enormous success and lines up with the company’s stated goal of becoming the “OS of Music.”

Spotify’s willingness to cut direct deals with record labels just might help it reach that goal. Spotify recently launched twelve new apps backed by the major labels. Pandora lacks such deals, as do many other services. Because of this, Pandora pays a hefty sum in royalties—a significant strike against its business model. Still, the company’s growth rate has remained strong since it went public last June. Figures released in March indicate that Pandora streams over one billion listener hours per month, an astounding 88 percent growth from a year earlier.   Pandora’s share of the total American radio audience was up to to 5.74% as of February, and mobile users now account for over 70% of Pandora’s usage.

The competing Pandora and Spotify models reflect back not only on the marketing efforts behind them but also also on the customers who use them. Which service you choose likely depends on how you prefer to listen to music.

Many customers prefer streaming music function as a surrogate radio, with a mix of songs playing all day in the background. Pandora is obviously a good choice for this crowd, but then so is traditional radio and satellite services like SiriusXM. Where Pandora adds value is with its intuitive algorithm, which attracts a more discerning clientele looking to avoid both the ubiquity of Top 40 hits and the more miss than hit playlists at niche radio stations. Pandora is perfect for people who know what they like and don’t mind hearing it all day long.

Spotify offers a more interactive option, attracting a broad crowd interested in sampling new albums and seeking out favorites from the past. Its functionality also makes it a perfect replacement for iTunes as your desktop music app. But it’s also easy to get lost in Spotify’s infinite music aisles. Although it’s possible that some people will seek out friends’ shared playlists—or President Obama’s eclectic mix—most users will probably revert back to the same sort of artists and albums they used to lug around in massive CD folders.

Of course, there’s nothing to stop you from using both services. Some days it’s fun to track down albums like Low on Spotify and listen to them in their entirely. Other times it you may feel like plugging Bowie into Pandora and seeing what comes next.

At the moment, the scorecard would probably favor Spotify. The service offers an on-demand music library across platforms, while Pandora and other “radio” providers do not. Spotify should have no problem integrating curated radio features, while Pandora will have a difficult time matching Spotify’s massive selection without direct deals with labels. Pandora could still continue on as a specialized service, but it could also be bought out by Spotify or another competitor.

One clear lesson for streaming service providers is that customers want apps that can multitask. Both Spotify and Pandora have succeeded because it’s so easy to use their services on different platforms. Spotify works perfectly on smartphones, while Pandora is establishing itself in the lucrative automotive market.

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