Corporate Corner – Slacker pushes to make money in digital music

by Ari Levy

This app shows a music guide from Slacker, which has deals with ESPN and ABC as well as record labels. Photo: Courtesy Slacker Inc., Slacker Inc.Slacker Inc. has spent the past six years as an also-ran in the digital-music business, where even the leaders have struggled to make money.

The San Diego company says that’s about to change, with a revamped mobile application and website that’s backed by a $5.5 million advertising campaign attacking rivals Pandora Media Inc. and Spotify Ltd. In preparation, the startup has more than doubled its staff to 90 in the past eight months.

“It’s an opportunity for us to throw a punch when nobody’s looking,” said Chief Marketing Officer Craig Rechenmacher, who moved from Electronic Arts in July and opened the company’s marketing office in Palo Alto.

For consumers, Slacker presents another choice in a crowded field. The company is touting a music service with 10 times the number of songs as Pandora, as well as content from ESPN and ABC. And in a market where Pandora gets close to 90 percent of its sales from ads, Slacker’s model is focused on paid subscriptions, which account for two-thirds of revenue.

Chief Executive Officer Jim Cady said Slacker invested heavily in consumer research to see what it would take to get people to switch from competing offerings, and what they would be willing to pay. Its monthly $3.99 ad-free service includes unlimited song-skipping. A $9.99 option makes any song or album offered by Slacker available on demand. Slacker says that more than 500,000 of its 4 million active users are paying subscribers.

“It’s really an ad business that is helping a subscription business, but not dominating the subscription business,” Cady said.

Music discovery

Slacker’s new mobile app and website are designed to make it easier for members to discover music and use premium features. The company has to overcome its past setbacks, including a failed foray into the hardware business, followed by an unsuccessful effort to compete with Oakland’s Pandora in the ad-supported market. Slacker has raised $50 million in venture funding since 2010 to build a subscription business, the company said.

For the ad campaign, Slacker is spending $2 million up-front and $3.5 million the rest of the year. In a commercial, a character complains about Pandora’s smaller music library, and a display ad criticizes Spotify for its propensity to post annoying updates to a user’s Facebook account. The ads will show up on sites including YouTube, SBNation and Buzznet.

Growing market

Winning won’t be easy. Pandora boasts more than 65 million unique monthly members, and Spotify has more than 20 million, compared with Slacker’s 4 million. Meanwhile, there’s a whole crop of other digital-music and radio offerings from companies like Rdio Inc., Rhapsody International and TuneIn. And they all face the looming threat of Apple. The maker of iPhones has been in talks with labels about a Web radio service, people with knowledge of the negotiations have told Bloomberg.

Marija Jaroslavskaja, an analyst at IHS iSuppli in Santa Clara, estimates that revenue in the market for digital-music subscriptions will more than triple by 2016 to $986.9 million from $319.2 million last year.

“It’s a matter of getting users,” Jaroslavskaja said. Slacker’s “business model distinguishes them from the rest of the players in the U.S. market, but in terms of the consumer proposition, that’s more difficult,” she said.

On the cost side, the biggest difference between Slacker and Pandora is how they pay royalties. Slacker has direct relationships with all of the major record labels and more than 1,000 independents, while Pandora has a licensing deal with SoundExchange, a trade group that collects royalties and distributes them to artists and publishers.

Betting on ESPN

For Slacker, each deal includes an up-front licensing fee and then a revenue share. The company has struck similar deals with ABC, ESPN, the Weather Channel and American Public Media.

Dominic Paschel, a spokesman for Pandora, declined to comment on specific competitors. He reiterated the company’s goal of reaching a 20 percent operating margin as revenue growth continues. Pandora’s third-quarter margin was 1.8 percent. The company said its market share for all U.S. radio reached a record 7.1 percent in November, up from 4.3 percent a year earlier.

Slacker’s revenue has doubled each of the past three years and should do so again in 2013, bringing the company to profitability, Cady said.

Luring users to its ESPN offering is one way Slacker plans to boost its revenue. Slacker brings live national and regional feeds from the sports network as well as snippets of popular shows. Paid subscribers can personalize their stations to prioritize updates from their hometown teams. In March, ESPN will roll out a Slacker station featuring Scott Van Pelt and Ryen Russillo, hosts of the “SVP & Russillo” show.

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