Think the Ads on Pandora & Spotify Are Annoying? Terrestrial Radio is 10x as bad!

A few months ago I got a new head unit (think car stereo) that has no CD player, just AM/FM radio, and ability to control Android/iPhones with Pandora and streaming MP3s via Bluetooth or USB. While my phone usually connects automatically, sometimes I have Bluetooth off and I’m too lazy to spend 60 seconds playing with settings to get the unit and my phone to pair, so I listen to terrestrial (FM) radio, usually NYC “classic” rock station q104.3.

I hadn’t listened to terrestrial radio in probably a year or two until a few weeks ago, since I’ve been using my own music library, Pandora, and Spotify (free, ad-supported versions of both). After a few dozen hours of listening to FM radio, I can say unequivocally the frequency and sheer airtime dedicated to ads is probably 5-10x that of both Pandora & Spotify. Its absolutely ridiculous! 10x 30-second+ ads in a row on FM radio every 10-15 minutes v. what, 3 ads in a row on Pandora/Spotify every 20-ish minutes? Before I get off onto a rant, we should examine this phenomenon from a both the user and advertiser perspectives.

As a listener, this provides a strong incentive for me to use Pandora/Spotify/my own music instead of listening to FM radio, and, since using any of those alternatives is incredibly easy these days, that is what I usually do. This is to say nothing of the fact that terrestrial radio, much like most media (eg TV “News” networks) pander to the lowest common denominator by playing only hit songs over and over (and over…) instead of throwing some great but less popular ones into the mix like they used to do, but I digress…

From a business standpoint, though, the picture looks a bit different. Anyone who’s spent any time listening to Pandora and/or Spotify (again, the free versions) knows that a not-insignificant amount of ad time is dedicated to ads for the premium, paid versions of each service rather than ads from 3rd parties. Sure, terrestrial radio stations do their fair share of promotions, but their ad inventory (if we can still call it that) seems to be comprised of a far greater % of 3rd party ads, as compared to Pandora & Spotify’s ad inventory.

So, why is this the case when its fairly clear from any number of indicators that terrestrial radio is in decline while digital is broadly seen as “the future?”

The above chart compares the performance over the past decade of Cumulus Media (CMLS), XM Sirius (SIRI), the S&P500 (^GSPC), the Russell2000 (IWM), and Entercom Communications (ETM). The first and last are basically pure-play terrestrial radio broadcasting companies, while SIRI is, well, the satellite radio network that, technology aside, isn’t all too different from terrestrial radio, at least relative to the customization that makes Pandora & Spotify so attractive to users. Cumulus Media is down about 77% over the past decade, and Entercom is down even more, SIRI (here really just for kicks) is down a relatively mild ~50%, and the broader market indicies are both in double digit positive territory.

So, investors have largely abandoned the terrestrial radio stocks (at least these two), yet they still grab the majority of radio(-ish) ads, a few thoughts on the “why?” question:

Technology-wise I’m not sure how Spotify & Pandora use geo-targeting for ad delivery, but between not doing a very good job selling local/regional ads nor delivering them well, it seems the terrestrial (and to a lesser extent satellite) radio broadcasters are still getting the majority of such ads. Even if Pandora & Spotify had flawless targeting algos and rockstar ad sales teams – and aggressively pursued/made inroads into local/regional ads – I’m not so sure the transition would happen quickly, not nearly in fact.

Why?

If your in charge of advertising at a company, whether its a local car dealership or a national chain, you’re unlikely to be incentivized to mess with the status quo; if you’ve been using terrestrial radio advertising, you’re either going to continue to do so or simply terminate the relationship if performance gets bad enough (and it usually has to be pretty bad for that to happen). Your media buying and advertising co’s may try to get you to spend some money on digital (in various forms), but no executive is going to risk their job saying “Hey, none of our customers listen to FM radio any more, let’s take that money and spend it all on Spotify, Pandora, and SIRI!”

Just like with the evolution of web ads, some co’s will (and have) start(ed) to test the waters, and as the industry leaders grow their user base & fine-tune their ad delivery systems, I expect adoption to follow a similar adoption/transition curve as tv/outdoor/print -> web.

The advantages/value proposition are/is quite similar; better & more granular data on listener demographics, preferences, tastes, and networks enabling better ad targeting – at least in theory – and thus more bang for advertisers’ buck.

Recall, though, web ads have been around for the better part of 2 decades and its only in the past few years that they’ve really gone mainstream to the point where every company has or is working on an online advertising strategy. Digital, user-customized radio service advertising is still in its relative infancy, so while I doubt it’ll take 15+ years for co’s to transition, its not going to happen overnight.

How do you play this? Just like that, slowly, patiently, and with great discipline. Radio stocks are already pretty beaten down but as the transition happens – and it won’t be a complete one, that’s a key point – they may very well sink even further or even go bankrupt. They may also get bought by bigger conglomerate media companies and your “obvious” shorts/long puts may get crushed. Also, Pandora and Spotify aren’t necessarily the long-term winners yet even though it may seem that way today; just take a look at Pandora stock since the IPO, down about 35%! If/when ad $’s start flowing towards those co’s, you should also expect new entrants vying for a piece of the pie, increasing competition and putting pressure on margins and growth.

Patience, my friends, patience and discipline. And, as always:

CAVEAT EMPTOR

h/t @tmtanalyst

11 thoughts on “Think the Ads on Pandora & Spotify Are Annoying? Terrestrial Radio is 10x as bad!

  1. Only one comment: The current ads on both Pandora and Spotify combined are nowhere near as annoying as just a portion of commercial time on terrestrial radio. Furthermore, the ads are not crazy in your face yell-at-you ads. They’re usually calm, gentle, and get the point across. While not a Spotify or Pandora premium subscriber yet, I may consider it in the future because both these services provide tremendous value.

    Terrestrial radio is dying the slow death of a thousand cuts and, if it doesn’t re-invent itself in the next 10 years, will probably disappear entirely to give way to better communal ways of music listening.

  2. I have been in the radio biz over 30 years. I personally do not know of a single radio station that plays 10 :30′s in a stop set 4 times an hour…which is what you have stated. That would be 5 minute stop sets times 4…or 20 minutes an hour of commercials. Tell me call letters of a station that does that. I think you’ve made a blanket mis-representation of our industry. BTW let’s not even talk about newpapers, billboards, magazines and television. Advertising is everywhere….but not 20 minutes an hour on radio….not even close!

    • The station I mentioned is particularly bad, but its anecdotal, not a statistical study, so keep that in mind.

      • Similar to Steve, I’ve been in the radio business for a long time (15 years), but I happen to work on the digital side. The station you mention — Q104.3 — is owned by Clear Channel, a company that anecdotally runs 10-12 minutes of commercials per hour on average across their music stations. Also, Clear Channel is one of the digital leaders in the industry; they operate iHeartRadio, which streams all of their terrestrial stations but also has a 100% commercial free version with the same functionality as Pandora and/or Spotify.

        It should also be noted that multiple studies in the last year have shown that advertising on terrestrial radio is often more efficient than Pandora, and that a listener’s tolerance for ads on Pandora tends to be lower.

        I understand you were simply trying to make a point based on one isolated experience, but criticizing an entire industry and/or propping up a particular service or company without understanding the complete business conditions that actually exist is a mistake.

        • Good points, thanks. Was just listening to q104.3 earlier and counted 8 commercials in a row, which is probably about average for them (including their own promotions).

          I don’t doubt that right now ads on terrestrial radio may be more effective today than ads on Pandora etc, but over the next few years, I expect ad $’s to shift to digital like Pandora, Spotify, and maybe even iHeartRadio and others. Spotify is particularly attractive since many users are logged-in through Facebook so it should give radio advertisers the most & most granular data about listener demographics/tastes/etc than any other service. Terrestrial radio isn’t going the way of the Dodo bird any time soon, but I fully expect ad $’s to increasingly shift – slowly at first but growing exponentially – towards Pandora/Spotify/etc, just as has been the case with the shift in ad $’s to web display & other types of online ad formats.

        • I’m not in the radio business, but I have listened to radio for 25 years ;) — my tolerance of ads is DIRECTLY related to how annoying they are. I can tell you that I frequently mute the radio or change stations when an annoying ad comes on. If I’m driving, muting often results in me missing the program when it comes back on, but I don’t care because I’m so perturbed at the ad I was just subjected to.

          Granted, often these are Ad Council spots or PSA’s of some sort, which insult my intelligence as a human being.

          My biggest problem with Clear Channel, and Cumulus, and the like, is that one by one (and I travel between states listening to the radio) the stations are losing their local color. Long-time reporters are being laid off at talk stations, and FM stations are replacing local DJ’s with people like Delilah. Yuck. Ew. I thought Delilah was local because she’s on a local station, then next thing you know I’m in a different state on a different station and THERE SHE IS!

          Ok I have nothing against Delilah, she’s just not my type. ;)

  3. Great article, Jordan! I have noticed in the last year or so that the station I listen to most often has gone progressively downhill in respect to its advertisements.

    Local businesses used to be the bulk of advertising on this (AM) station, but now even during the middle of the day it’s filled with Ad Council/PSA ads. Usually they want to remind me to cook my food, wear my life jacket, or take my child’s Asthma seriously. As if I couldn’t figure out that a kid with Asthma needs help. Please, I had Asthma and I don’t need the government telling me to take it seriously.

    I have noticed this, however – there are an ever-increasing number of ads ON this ClearChannel station telling me to listen to iHeartRadio. You can listen to this station since it is on iHeart, but what surprises me is that they want you to listen to all the other stations, as if they don’t want you to listen to the one you’re already listening to. Seems counter-productive. Also, the fact that the iHeartRadio ads are incredibly annoying makes me want to change the channel as well. I think they’re killing live talk radio as we know it.

  4. All of these services sound the same to me. They play the same music as FM radio and are always interrupting my studying with some commercial. I just found http://www.earbits.com the other day and they are totally free online radio without any ads. It’s perfect music to work to.

  5. All of these services sound the same to me. They play the same music as FM radio and are always interrupting my studying with some commercial. I just found http://www.earbits.com the other day and they are totally free online radio without any ads. It’s perfect music to work to.

  6. Write more, thats all I have to say. Literally, it seems as
    though you relied on the video to make your point. You clearly know what youre talking about,
    why waste your intelligence on just posting videos to your site
    when you could be giving us something informative to read?

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