Tim Westergren, chief strategy officer and founder of Pandora, was the keynote speaker at the Digital Music Forum West this morning. We interviewed Tim about a year and a half ago and at that time Pandora faced some real challnges.

In his keynote, Tim updated the audience on the current state of Pandora and his thoughts on the future of online radio.

Tim started his speech by observing the how the when you book a flight on Expedia you get a slew of other offers for hotels, cars, shows and even pedicures. He stated that their might be a lot of lessons for the music industry that can be learned from the travel industry.

The focus of his talk was “From Competition to Interdependence”. He observed that in the arduous discussions of royalties and the subsequent compromise everyone had to give to make it work for everyone.

Broadcast radio is a big guerilla in music. Of the 20 hours people spend listening to music each week, 17 are listened to on radio. Music will go as radio goes.

Artists and labels have organized themselves around the radio industry. All the effort goes into getting on the air.

Broadcast radio is gradually being replaced by online radio, driven heavily by the mobile revolution. This is changing the relationship between radio and artists.

In online radio, it’s much more democratic and inclusive thousands and thousands of artists can now be included.

And the money flows are changing too. The money broadcast radio collected from advertisers mostly stayed with the radio station. In contrast with online radio a large percent of the money flows through to the artist. Of the $40 million in revenues that Pandora collects a 75% will flow through to artists via royalties.

The industry structure is also changing as artist services are growing fast.

The missing piece has been scale. How do you get this new interdependence to work at scale?

Pandora is now starting to reach scale. Pandora now has 36 million registered users,
12 million mobile users, 65,000 new registrations a day and providing 2 billion hours of radio in 2009. This is an example of online radio starting to reach the scale tipping point where they attract national advertisers who want to reach large markets. This means that more and more money can flow through online radio to the artists.

He also sees a day when services like Pandora can become a really rich source of information to bands about who is listen to their music, what they listen too, where they are etc all provided via a dashboard.

Tim’s ultimate vision is to have 1 billion users listening to music on Pandora creating a global scale that provides lots and lots of money to artists.

At the Digital Music Forum West event, a panel focused on the future of internet radio.

Panelists

• Dave Conway, Founder, Little Radio
• Johnie Floater, General Manager, Media, Live365
• Kurt Hanson, Publisher, RAIN / CEO, AccuRadio
• Jim Rondinelli, SVP of Strategic Development, Slacker
• Moderator: David Oxenford, Partner, Davis, Wright, Tremaine LLP

Why is Internet Radio relevant?

Kurt Hanson, of RAIN, points out that radio is how the average music fan finds music.

Johnie Floater, from Live365, the most important aspect of internet radio is bandwidth to support huge diversity of content.  Even the classical music of the Canary Islands can have its own channel on the internet, something which is not possible on terrestrial or satellite radio.

Jim Rondeinelli, of Slacker, points out that most people don’t want to program their own music flow and radio provides that programming.

How do you make money on a radio focused on a micro segment?

According to Floater, subscriptions are about 50% of the revenue coming into Live365 radio stations.  Rondinelli seconds the subscription model as being an important part of Slacker’s revenue.

Is advertising on internet radio working?

From the discussion on the panel, it seems to be hard to find advertising for internet radio due to the small size of each channel’s audience.  Sponsorship seems to be a model that the panel sees as having more success.  Slacker seems to be having more success with advertising selling out their inventory in the first quarter.  Floater says that they get their advertising on traditional channels focused on popular music.

Rondinelli points out that local advertising pays a lot better than broadcast advertising.

What about internet royalties?

The panel dove into the discussion without hesitation.  Rondinelli describes the major differences between the royalties paid by satellite radio, terrestrial radio and internet radio, with internet radio paying much higher rates.  He goes on to say that paying different royalties based on method of delivery is ludicrous.

Hanson points out that if the music industry got the royalties they want then the entire internet radio would shut down.

Is Internet radio competing with terrestrial radio?

Hanson says that it is both a competitor and a supplement to terrestrial radio.  When Live365 etc are built into the car, then it acts like a competitor. Floater says that if you look at the entertainment pie, music is just one slice.  Over time the internet is gaining an increasing share of the music slice.

Rondinelli says it really is location dependent.  If your in your car, you’re most likely listen to terrestrial radio.  Hanson points out that with an iPhone you can get internet radio right in your car.  Rondinelli says its not so great with the AT&T network in many places.