Pandora is still alive after getting run over by Spotify and Apple, and the CEO says his comeback plan will open up another big business in music

• Spotify and Apple Music have been dominating the streaming music business of late, growing their number of users by the tens of millions.
• But Roger Lynch, CEO of Pandora, thinks his company's service can carve out a profitable niche next to those two giants.
• Pandora has been shedding users and ad revenue in recent quarters, but Lynch has been taking steps to shore up both.
• While Pandora offers a subscription streaming service, Lynch thinks its best opportunity could be with its core ad-based service.

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The digital music business has taken a decided shift toward subscription streaming services, and Spotify and Apple are dominating the market.

But Roger Lynch insists there's still a place for Pandora.

"I definitely think there's room," said Lynch, the CEO of Pandora, in an interview this week with Business Insider.

Nearing his first anniversary as the streaming music company's boss, Lynch discussed his plans and strategy for Pandora. Despite dominating the internet radio market, Pandora has never posted a full-year profit since becoming a public company in 2011. Lately, the company has seen its sales growth slow to a crawl and its losses swell as its total number of users and the number of hours they tuned into its service declined markedly.

Those user and usage declines have come as Apple Music and Spotify have garnered new subscribers by the millions.

Despite that, Lynch is convinced there are bright days ahead for Pandora. That may not be shocking given his position at the company. But what may be surprising is where he sees the company's best opportunity.

Pandora is doubling down on its free service

Rather than focusing on Pandora's own subscription music business, Lynch is doubling down on its older advertising-based internet radio service. The company recently acquired AdsWizz, an ad technology company. Last fall, it addressed a longstanding complaint of customers of its free service, introducing a new feature that allows them to play songs of their choice on demand - after watching a video ad. And this week, it announced a deal with Snap that builds off that feature, allowing customers of its ad-supported service to share full songs with each other through Snapchat.

"For us, our free service really is our core business," he said. "It's not about … using our free service to drive subscriptions. It's about increasing engagement in that and driving ad revenue."

The advertising market for radio is about $16 billion, Lynch noted. But just like what's happening in video, that market is starting to shift from traditional sources to online services. Pandora is already the biggest player in digital radio ads, and the AdsWizz puts it in an even better position, Lynch said.

"If you believe in the growth of digital audio, both with subscriptions and with ads ... I think Pandora is incredibly well positioned for that," he said.

Lynch has a plan to shore up Pandora's ad revenue

But despite that shift, Pandora's advertising revenue has actually been slipping lately. Pandora's ad sales fell 4 percent in the first quarter compared with the same period a year earlier after dropping at a 5% annual rate in the fourth quarter. In its quarterly report for the first quarter, the company blamed the ad sale decline on selling fewer ads than it had a year earlier.

Right now, Pandora doesn't sell all of its ad inventory and it sells some of its ad spots for relatively low rates, Lynch said. But the company thinks it can improve its performance in both areas, thanks in part to its AdsWizz acquisition.

AdsWizz focuses on so-called programmatic advertising for digital audio services. Programmatic ad services allow companies to automate the process of selling advertising spots and to avoid having some go unsold. AdsWizz should allow Pandora to sell out its ad inventory and increase the money it sees per impression from delivering ads without having to increase the number of ads it actually serves up to users, Lynch said.

"All those factors go into improving the monetization on digital audio for us," he said.

He also thinks he can fix Pandora's decline in users

Pandora's ad revenues have slipped as the company has shed users. Its number of active monthly users fell from 81 million in the fourth quarter of 2016 to 72.3 million in the first quarter.

Some might see that as evidence that consumers are moving away from Pandora to Spotify and Apple Music. During that same time period, for example, Spotify's total users worldwide grew from 123 million to 170 million. But Lynch pointed to a different factor.

When Pandora asked why people stopped listening to its services, the vast majority of them said it was because they couldn't play a particular song or album on demand. The company's free radio service allows users to create radio stations that are inspired by particular songs, but they couldn't just start playing them.

Pandora launched in December a feature that addresses just that objection. Users can now listen to just about any song they want on demand, but they have to watch a 15-second video ad first.

For the company, the feature has an added benefit - those kinds of ads are in high demand, Lynch said. Pandora can just about guarantee users will watch them, and users generally don't object to them, because they get rewarded for watching them.

"That ad unit is incredibly valuable," he said, continuing: "Advertisers love it."

Lynch thinks Pandora complements Spotify, rather than competing with it

Regardless, Lynch believes Pandora can exist comfortably side-by-side with Apple and Spotify even though they all now offer similar services, because users perceive Pandora differently from the other two.

Pandora made a name for itself by creating lots of different radio stations that appeal to a variety of tastes and for customizing playlists for users based on what it knew about their personal musical tastes. Spotify stands for something different - the ability to play whatever song you want when you want it, Lynch said. To put it a different way, Pandora offers more of a lean-back experience than Spotify, he said.

"I doubt there are many people who would have both Spotify and Apple Music," he said. "There are a lot of people who would use Pandora in addition to one of those services."