Today Pandora Officially Crushes Terrestrial Radio

NEW YORK ( TheStreet) -- Unless you're doing something truly unique and compelling on terrestrial radio, Pandora ( P) just served you the proverbial papers.

Here I explain why investors should pay attention to ratings-related news Pandora released this morning. While the impact might not be immediate, we will look back on May 16, 2012, as the day Pandora -- and Internet radio in general -- rendered terrestrial radio, on a grand scale, obsolete.

I add "by and large" because a place will always exist for traditional radio. What I envision, however, is a product that delivers, almost solely, spoken-word formats -- sports, talk, all-news, etc. -- on the FM band. Examples include top all-sports stations such as WFAN in New York and "The Ticket" in Dallas, which ultimately belong on FM and online, where key demos reside.

Great personalities and tightly packaged presentations of information will always find sizable audiences, particularly if the terrestrial companies continue to embrace multi-platform delivery and scale back on physical properties. Expect to see terrestrial radio broadcasters shed physical stations and broadcast towers like big box retail now races to decrease square footage in feeble attempts to counter Amazon.com's ( AMZN) dominance.

So what's the big deal for investors?


On Wednesday, Pandora announced that Triton Digital released a product that will -- and consider this an understatement rather than an overstatement -- change the game in terms of how advertisers decide to allocate their radio dollar. As the company's press release explains:

Triton Digital will measure Pandora's audience size and reach nationally and in local markets with the new Triton Webcast Metrics Local solution, a market-specific version of Triton's national Webcast Metrics audience measurement platform. The new Triton data makes it easier for radio buyers to quantify the size and scale of internet radio at the national and local level.

Here's the nutshell version of why this is a game changer: While Pandora already experiences success pitching local and national radio buyers advertising, it can now walk into a room with local ratings data compiled and crunched by a third party. Pandora can compare itself, from a ratings standpoint, with radio stations in local markets.

It took forever for somebody to do this. If Arbitron ( ARB) did not rely on Clear Channel ( CCO) and other terrestrial radio companies for a vast majority of its revenue, it probably would have stepped into the century years ago. In fact, if Arbitron was a real, living, breathing and truly independent and entrepreneurial company, it would have bought Triton or a similar firm years ago.

In any event, on the ground, here's how it looks. Today, a Pandora sales rep can walk into a meeting with a client in the Dallas-Fort Worth metro area, for example, and make jaws drop.

I obtained Arbitron ratings numbers for the DFW market covering the three demos Triton reports for Pandora in the March ratings period during the Monday to Sunday, 6 a.m. to midnight daypart (for the record, I follow Arbitron's fair use guidelines for publishing details of its proprietary ratings data):
  • Among 18- to 34-year-old adults, Pandora, based on a comparison of Triton's data with Arbitron's data measuring terrestrial radio listening, ranks No. 1 in the market, with a 1.1 AQH Rating. That puts it ahead of the top terrestrial broadcaster in the market, a heritage Top 40 station, by a considerable margin.
  • Among 18- to 49-year-old adults, Pandora comes in tied for first place with the same Top 40 station.
  • Among 25- to 54-year-old adults, Pandora ranks second, just behind the same Top 40 outlet.

Several important notes for the record: First, it's no surprise Pandora sports a stronger showing in the 18- to 34-year-old demographic, as its audience skews to the younger end of the larger 18- to 54-year-old group.

Second, an AQH rating equals the percentage of people listening out of the entire target population, whether or not they are listening to radio. Do not confuse this with AQH share, which measures the percentage of people listening out of all of those listening to radio at a given time. AQH stands for Average Quarter Hour. To show up in the results, a listener must tune into Pandora for at least five minutes during the specified time. In this regard, Arbitron uses the same methodology when tracking terrestrial radio listening.

That's powerful stuff. Maybe more importantly, Pandora can leverage these numbers to not only take an increasing amount of ad dollars from terrestrial radio, but to help buyers make the inevitable shift toward mobile environments with at least a portion of their budget. I outline Pandora's position in that regard in an article I wrote before getting this information.

In concert with new and improved ratings data and proof about the emergence of mobile -- and Pandora's dominant role in the space -- the company's salespeople can, do and will promote the power of Pandora's ability to target its listeners on the basis of factors such as age, location and musical taste.

A recent story drives home the power of targeting. Pandora created an "ad" for one of its users.

A guy in Texas wanted to propose to his girlfriend. They're Pandora listeners, so he hooked up with the company, who ended up producing an ad it played while the couple was listening. Nobody but the couple heard the ad. It was completely personalized to the girlfriend (who said "yes").

While executing marriage proposals on a large scale would likely be too big an endeavor for Pandora to undertake, given the potential return, this story is not only incredibly important on its own; it ties into the ratings and advertising angles.

Over the years, terrestrial radio has done a solid job connecting with listeners in many ways. Things such as Casey Kasem's "Long Distance Dedication" and standard requests and dedications, particularly late at night, have always helped build the bond. Creating loyalty with listeners drives ratings, which, obviously, aids efforts to sell advertising. With that in mind, Pandora could make a feature out of this. It does not have to go large scale, but it does not have to be -- and should not be -- a one-time thing.

Maybe more importantly, Pandora sales reps can use this story as a way to break the ice with skeptical advertisers. If we can target one of our millions of users in such a personal and powerful way, we can target your prospective customers in similar fashion.

I would have to assume Pandora's sale force hit the phones and the streets with this story and new ratings statistics today. While the results might not show up in this quarter or the previous quarter the company reports on next week, I expect to start seeing continued revenue growth and an influx of ad dollars coming to Pandora instead of terrestrial radio.

Because Pandora could lose a considerable portion of the 42% or so it has tacked on in the last month (the stock hit an all-time low of $7.83 in April and traded for $11.13 midday Wednesday), proceed with caution in the near term. That said, I am not sure a better long-term opportunity exists in the stock market today.

At the time of publication, the author was long P.

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