The road to online music streaming is littered with the bodies of startups with interesting ways of sharing music. And internet radio darling Pandora was almost one of them — multiple times. This weekend, The New York Times documented the various ways that Pandora almost went out of business over the 10 years of its existence.
Pandora is on track to earn $100 million this year. That turn around is due to a number of issues. Some of them are extenuating circumstances — like recently reduced royalty fees for streaming songs. But Pandora has also been paying attention to changes in consumer behavior and digital payment structures. Their new revenue streams — including online ads, new streaming deals and a paid streaming model — prove that there’s not always one way to bring in a dollar.
Music streaming is a sector with myriad hurdles standing in the way of profitability. Pandora started off as a music recommendation service for businesses in 2000. After the dot-com bubble burst — and funding dried up — Pandora CEO Tim Westergren shifted his focus to bring music to consumers rather than businesses. And while the company found a strong following of consumers, revenues didn’t follow. Especially after record companies demanded royalty fees for individual songs in 2007.
But Pandora enlisted its coterie of brand advocates to champion its cause. According to The Times:
“Pandora hired a lobbyist in Washington and recruited its listeners to
write to their representatives. ‘A lot of these users think they’re
customers of the cause rather than users per se,’ said Willy C. Shih, a
professor at Harvard Business School who has written a case study on
Pandora. ‘It’s a different spin on marketing.’ The board agreed to
negotiations and after two years settled on a lower rate.”
Pandora also hired Steve Cakebread from Salesforce.com as CFO to help run the business. But even after royalty fees were lowered from 0.19 per song
played to $.08 per song or 25% of revenue, Pandora needed additional money to help bear the burden of streaming costs and other overhead.
The company has been interspersing its stream of songs with advertising for a few years to help defer costs. But also, in 2008, they launched an iPhone app to stream music in mobile. From the Times: “Almost immediately, 35,000 new users a day joined Pandora from their
cellphones, doubling the number of daily signups.”
Meanwhile, Pandora is asking heavy users to pony up for the music they love to stream. Free users are allowed 40 hours of free listening per month. For music over the limit, it costs 99 cents to listen for the rest of the month. If users know they’re heavy listeners, they can forgo ads altogether and listen to unlimited streams for $36 a year.
This freemium model has worked well for Pandora, in part because they have closely tied every payment decision to the fees and charges that Pandora is required to pay. Users who came out to defend the service when the labels wanted to gouge online streaming are now aware that the music they want to get for free isn’t free to deliver.
And Pandora isn’t just depending on direct payment and ads delivered to consumers to increase its bottom line. The company has also hired George Lynch, an executive from Sirius XM Satellite Radio, to help win new listeners this year through streaming Pandora into multiple new vehicles by the end of the year.
While the terrain of streaming music may shift in unfavorable ways yet again, Pandora has done an excellent job of communicating its difficulties to consumers without forcing them to bear the brunt of the burden for those fees. Consumers can still access the company’s great music genome to discover music, but if they really value the service, they have to pay for it. Or put up with small inconveniences that help bring in revenue through alternate means. Meanwhile, the company is working to partner with other brands to deliver music in new ways and come up with other means to share its music now that it’s become clear that unlimited free sharing couldn’t last forever.