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Pandora Pumps Up the Pricing

Pandora Pumps Up the Pricing

Pandora's price hike reflects the steep rise in royalties the company must play for the tunes it streams to listeners. However, as worrisome as that upward trend may appear, it affects only a small minority of the service's customers. Most of its 250 million users tune in to Pandora for free -- that is, in exchange for listening to the ads included with the free model.

By Erika Morphy
03/24/14 11:22 AM PT

Pandora last week said it would increase its monthly charge for new users who sign on to its ad-free service by US$1 a month. Starting in May, the price for users who want to pay month by month will be $4.99.

Existing Pandora One monthly subscribers will not experience a price increase at this time and will continue to pay $3.99 per month.

Pandora made other tweaks to its pricing model, as well.

The annual subscription option, at $36, is ending. In its place will be a "discounted loyalty price" of $3.99 per month, which equals $47.88 per year. Annual subscribers approaching their renewal date will be notified about the update. New subscribers can sign on to the annual subscription price package, which would save them about $1 per month.

The price increases are being put in place to cover the rising licensing costs for the music, Pandora said. The subscription-listening royalty rates it pays to performers via SoundExchange have increased 53 percent in the last five years and will increase another 9 percent in 2015.

Trouble for Pandora

Pandora clearly is experiencing cost pressures with its business model and felt this was its best recourse, said Francis Petit, associate dean for executive programs at Fordham University.

"The United States District Court recently ruled that Pandora must pay the American Society of Composers, Authors and Publishers the same 1.85 percent rate through 2015 as opposed to the 1.7 percent rate that Pandora was desperately seeking," he told the E-Commerce Times.

Overall, this price increase has many strategic implications, he continued. Pandora has to pay a fee every time a track is played. Worse, the more users, the more expensive it is to operate. It is a questionable business model, Petit drily noted.

Also Pandora is feeling more competitive pressure from such companies as Google, Apple, Microsoft, Beats Music and Spotify -- all of which are pushing into the streaming music business with more resources than Pandora.

In short, while Pandora has posted positive revenue growth over the last quarter, the company's overall expenses are growing faster than its revenue, leading to a negative core free cash flow of about $3 million.

Meanwhile, companies like Google and Apple over the past quarter have generated large core free cash flows, meaning "these organizations can significantly outspend Pandora in terms of their business development," he said.

To add insult to injury -- from Pandora's perspective -- "it has been noted that Google Music and Apple's iTunes offer significantly more features and benefits when it comes to music storage and unlimited free listening," Petit concluded.

Shifting to an Ad-Supported Model

Cost-conscious consumers who do a cost/benefit analysis of Pandora's service might be inclined to switch back to the free, ad-supported model. Indeed, the percentage of users on the subscription model is very small, as Pandora itself noted, with the price change affecting 3.3 million subscribers out of 250 million registered users.

Ad-supported services in general tend to be very viable, Petit noted, although their focus usually is limited to quarterly dividends and short-term gains rather than evaluating the long term analysis of the company and its positioning.

"Free" actually will increase in its appeal if done properly, said Patrick Reynolds, chief strategy officer of Triton Digital.

Of course, "advertising must be relevant in terms of targeting appropriately," he told the E-Commerce Times. At the same time, advertising must be restrained in its quantity. "Overloading any music service with too much advertising, however relevant, is the fastest way to kill it," he said.

In the end, large publishers likely will continue to derive revenue from both models, Reynolds said, but ad-supported models likely will continue to comprise the larger piece for the foreseeable future, especially if subscriptions continue to rise.


Erika Morphy has been writing about technology, finance and business issues for more than 20 years. She lives in Silver Spring, Md.


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