Bill Feinstein has never been a fan of advertising on terrestrial radio, especially since the New Jersey dealer is forced to pay for ad spots on five or six local radio stations to cover his geographic layout in the Metropolitan New York area. That’s why he’s spending $10,000 to $15,000 per month on Internet radio’s most popular service: Pandora.

"The cost was just prohibitive if you have a decent schedule on all of those stations," says Feinstein, the president and co-owner of New Jersey’s Planet Honda. "The population of this area is eight million, and I really only need to reach about 800,000 of them. With Pandora, it’s so much more targeted, and it’s far less expensive."

Internet radio has spent the last decade fighting for relevancy with listeners and advertisers. The emergence of mobile devices helped, unplugging Internet radio from desktop computers and allowing a service like Pandora to attract more than 150 million registered users — 56.2 million of those accounts active as of August — in a seven-year span.

But to win over more dealers like Feinstein, Internet radio needs to be heard where the Pew Research Center says most radio listening is done: in the car. And that’s exactly how things are playing out, with more vehicle models slated to roll out in 2013 with the ability to connect to services like Pandora. That’s why Feinstein didn’t hesitate when Pandora began wooing small businesses to advertise earlier this year. And so far, he likes what he sees.

"I really like the accountability and the measurability," said Feinstein, who expects Planet Honda to sell about 4,800 new vehicles and another 2,000 used units this year. "With radio, I’ve always found it’s so nebulous that it was just hard [to measure]."

Nineteen vehicle manufacturers have integrated Pandora’s service in about 50 vehicle models. Honda was the fourteenth automaker to do so, announcing last November at the Los Angeles Auto Show that the 2012 CR-V would offer a Pandora connection as a standard feature.

Nineteen vehicle manufacturers have integrated Pandora’s service in about 50 vehicle models. Honda was the fourteenth automaker to do so, announcing last November at the Los Angeles Auto Show that the 2012 CR-V would offer a Pandora connection as a standard feature.

Opening Pandora’s Box

Pandora launched in 2005 on the belief that music fans enjoy the variety served up by traditional radio, but wanted a little more say in which songs are selected. Development of the engine that would drive that customization began in 2000, when Pandora’s founder, Tim Westergren, launched what is called the Music Genome Project. The experiment brought together music experts to catalog songs by up to 450 distinct musical characteristics.

The project continues today, with Pandora’s musicologists analyzing about 10,000 songs per month to feed Pandora’s music engine. It allows listeners to create a customized station by simply typing in a song title. Pandora’s technology then locates similar songs from a variety of artists based on the initial song’s melody, harmony, rhythm and other characteristics.

Steve Kritzman

Steve Kritzman

Steve Kritzman, senior vice president of advertising at Pandora, believes that customization delivers a better connection between listeners and advertisers than AM/FM radio can offer. "Everybody’s station is a little bit different, which creates an interesting opportunity for advertisers to engage with listeners when they’re doing something they’re really passionate about and they love, which is music," he says.

But that customization does come at a price. Pandora paid more than 60 percent of its first-half revenue, a sum of about $116.3 million, to artists for use of their music, according to filings with the Securities and Exchange Commission (SEC). That’s why Pandora is hoping marketers will cash in on its captive audience. According to the same SEC report, advertising accounted for 88 percent, or approximately $160 million, of the company’s reported revenue of about $182 million.

The push now is to attract more ad dollars from small businesses. Kritzman believes the service has the audience and the listening hours to make a serious impact on a dealer’s local market. In August, for instance, listening totaled 1.16 billion hours, giving the advertising-supported service a 6.3 percent share of total U.S. radio listening hours.

"There’s a big change taking place in how and where people consume entertainment," said Paul Palumbo, founder and research director for AccuStream, a media research firm based in Seaside, Calif. "Pandora has been very successful in terms of establishing a real footprint in the mobile segment. It’s just a terrific platform to deliver messages of all types."

And Internet radio listeners don’t seem to mind the ads, at least according to New York-based TargetSpot. Conducted in January, the firm’s "2012 Digital Audio Benchmark and Trend Study" found that 50 percent of survey respondents recalled having seen or heard an Internet radio ad within a 30-day span, compared to 52 percent in 2011. Forty-four percent of those listeners actually acted on the promotion, up 10 percent from last year.


Test-Driving Pandora

The Internet radio service’s value proposition for advertisers should get an added boost with more automakers adding an in-car connection. About 20 manufacturers have integrated the service in about 50 vehicle models, with Mazda joining the club in June. Pandora also made a big splash at the New York International Auto Show in April when it announced Nissan would add a connection to the 2013 Altima.

"In our future, we see the auto space as a huge part of our listening future," Kritzman says, noting that 75 percent of users who tuned into the service in August did so through their mobile phone or non-traditional device. "It’s where the majority of radio listening takes place and, right now, people are listening to Pandora quite a bit in their cars, but they’re working hard to do it."

TargetSpot reports that 14 percent of Internet radio listeners are tuning in from their vehicles. As for how they’re tapping into Internet radio, 54 percent use a player built into their car audio system, while 32 percent play Internet radio in the car through an app loaded onto their mobile device. An additional 15 percent of in-car listeners say they use Bluetooth or their in-car system’s auxiliary input to play their Pandora stations.

Honda was the fourteenth automaker to partner with Pandora, announcing last November at the Los Angeles Auto Show that the 2012 CR-V would offer a connection as a standard feature. The company will also make the service available in the 2013 Accord and Civic, which will hit the market this fall. That announcement was music to Feinstein’s ears.

"Customers no longer worry about CD players; they want to know if there’s a USB connection for their iPods," he says. "When customers know how to use [pre-installed Pandora systems] and understand the functionality, they absolutely love it."

That reaction is one of the reasons Feinstein is a fan of Pandora. And out of the gate, Planet Honda’s mobile web traffic increased by 400 percent after Feinstein began airing promotions on the service in January. "I think it’s simply the fact that we went on Pandora," he says, noting that more than 70 percent of his digital ads are designed for mobile devices.

Feinstein, who puts his ad spend at $300 per vehicle, has already upped his monthly marketing budget — which averages between $150,000 and $200,000 — in order to include Pandora. He says about 40 percent of Planet Honda’s marketing budget is already directed toward digital marketing, and he expects that percentage to climb to 60 percent in the near future.

"We think Pandora’s a good start," Feinstein says. "Pandora gets the best of both worlds."

Pandora offers three ways to advertise: audio, video and display. Kritzman says the 250 dealerships currently advertising on the service alternate between all three. Some stores choose to display vehicle images on banner ads while also buying audio and video spots.

"Our platform is very much auditory in nature and visual in nature, so the smartest advertisers are taking advantage of both," Kritzman says, adding that the service boasts an 85 percent renewal rate among the local auto vertical. "Once they’re on, they’re pretty much hooked."

AccuStream’s Palumbo agrees, noting that marketers are learning about the importance of diversity on Pandora. "All of the media executions contribute," he said, listing standard banner boxes, in-stream ads, and gateway audio and video ads.

In terms of focused advertising, Kritzman says Pandora runs about two to three in-stream audio ads per hour vs. traditional radio’s 15 to 18 per hour. Users can opt out of listening to advertising by paying a premium, but Kritzman says the number of paying subscribers is low. According to the company’s filing with the SEC, the premium service accounted for about 12 percent, or $22,000, of Pandora’s first-half revenue.

And Pandora is more than a virtual billboard. The service offers advertisers analytics such as impressions served, click-through rates and overall engagement. Pandora also works hand-in-hand with dealers to track leads and help optimize their campaigns.

Feinstein, who purchases a million impressions per month, calculates that he is reaching more than 200,000 unique listeners. "Some of the reasons you’d pay for traditional broadcast are some of the same reasons you’d buy Pandora, but the added benefit is you do get some hard conversion data," he says.

Palumbo says the OEMs, as expected, are among the chief marketers on Pandora. He lists insurance, pharmaceutical and financial services among the service’s other top advertisers. But he believes Pandora’s local reach could make advertising worthwhile for dealers, too. "It just makes sense for them on a local level," Palumbo said. "The size of the local advertising market is much larger than the national media buy."

And it will get even bigger as more vehicles roll out of the factory with an in-car connection to Pandora. "Our goal is to be in every car and every manufacturer," Kritzman says. "We want our listeners to listen whenever and wherever they want."

Even without that connection, the Pew Research Center notes that the number of listeners who used a smartphone to bring online audio into the car nearly doubled last year. Their research also indicates that shift, combined with increased interest among carmakers, will further dilute AM/FM radio’s influence. Listening to Feinstein describe the service makes it clear he agrees.

"People shouldn’t discount the strength of Pandora’s music engine and how intuitive it is," he says. "If you’re a music fan, it’s really great to be served up music that you may not have requested but is similar to the stuff you requested. You find new artists and songs. And you don’t have the prattle you might get from a DJ. It’s just music."