06/15/2011 12:27 pm ET | Updated Aug 15, 2011

Pandora's IPO: A Win For Listeners?

As Pandora’s IPO sends Wall Street spinning, the hefty infusion of cash will position the company to deliver a better experience to its estimated 34 million active users (and counting -- the company estimates a new user is added every second).

For Pandora, innovation must come quickly: With cloud-based music services on offer from Google and Amazon and Apple’s iCloud to be released soon, Pandora’s personalized radio service faces certain competition from virtual music libraries that allow consumers to create their own, customized playlists -- without the ads that make up nearly 90 percent of Pandora’s revenue.

Tech insiders agree that Pandora must address is its limited catalog. Jim Lucchese, the CEO of EchoNest, a music intelligence company that powers smart music applications, estimates that the company -- now 11 years old -- has 800,000 to one million songs in its catalog. It's a fair number but a relatively small portion of the broader music landscape.

After listening to any Pandora channel for an extended period of time, songs tend to repeat themselves. "There’s fatigue among longtime Pandora users, based on the catalog size," Lucchese said.

Pandora may need to update the technology it uses to add new songs to its library if it wants to keep pace. Songs on Pandora are now cataloged using the "Music Genome Project," a slow process that involves personnel listening to and cataloging each individual song and noting attributes relating to rhythm, tonality and instrumentation.

"The amount of music content is growing exponentially," said Mihir Sarkar, a doctoral student at the MIT Media Lab working in the "Music, Mind and Machine" research group. "But Pandora’s current model [of cataloging] is not scalable."

Both Sarkar and Lucchese said computer-based analyses of music are much more efficient -- and scalable -- processes. Lucchese estimated that EchoNest's computer-based analysis can catalog one million songs "in about half a day." In addition, computer-based services like EchoNest can search the web to determine what "people are saying about songs, based on blogs and websites," said Sarkar -- content that deepens the user experience.

Tapping into social networks is another area where Pandora stands to benefit. Wu-Hsi Li, another MIT Media Lab researcher working on music technology, said, "most music recommendations are social collaborations." Wu-Hsi said Pandora might tap into social networks so that music recommendations could be "based on what your friends like, assuming you will like something people like you like."

Lucchese agreed that integrating social networks will be key for music streaming services as they develop over the next few years. "Social media music applications are still in their infancy," he said. "There are enormous opportunities."

Another key issue for Pandora will be to ramp up access on a variety of platforms. Ben Bajarin, the Director of Consumer Technology at Creative Strategies, an industry analysis and market intelligence firm, said that with greater financial resources, Pandora could extend its presence on a variety of platforms. Unlike Apple and Google -- which both have their own phones -- Bajarin noted that Pandora is "not locked into any one piece of hardware." Because it is a radio service, he said, Pandora would "want to have access to as wide a range of devices as possible." For this, Bajarin said, "Broadening out is key."

As an example, Bajarin pointed to Pandora streaming on Samsung TVs and Netflix boxes: "Pandora had to spend their development dollars on that." If the IPO brings the company its expected windfall, Bajarin said "they can spend more on applications. With more cash, they can put engineering dollars towards more ubiquitous access to more platforms."

Lucchese also said Pandora needed to continue integration onto platforms that the consumer can touch, citing the car radio as a potential area for expansion. "FM and XM radio are not going to have a monopoly on the dashboard space for much longer," he said.

Whatever Pandora ultimately chooses to do with its newfound resources, it will still have to contend with two very practical hurdles: record labels and audience. As it stands, the company spends half of its revenues on licensing fees: Record labels still hold enormous sway over the company’s bottom line. Since Pandora licenses its songs as a radio network, a larger audience will result in higher fees, and any integration into social networks will raise questions as to how the music is licensed.

The other concern is audience: While many in the industry acknowledge Pandora’s uncontested ownership of the personalized radio space, some question how much that audience will pay for Pandora’s content. Adam Klein, the CEO of eMusic, a digital music club, said that "Pandora works fantastically in the office, where it’s background music playing for eight hours -- there’s a large audience for that." However, Klein said, "the evidence [we have] is that the sort of people who will pay a subscription fee for music are the people who are pretty serious about their music." These consumers, Klein posited, were unlikely "to pay subscription money for something relatively generic."

By expanding and deepening both its catalog and networks, Pandora may yet find a way to compete with other streaming services and cloud-based libraries -- and convince users to pay for it in the process. But the company will likely have to innovate its business model along the way. Right now, Pandora offers consumers two models: a free subscription with ads and a premium subscription without ads. "People are not used to paying for the content," said Sarkar, "people are just paying to stop the ads. That seems unsustainable to me."