Pandora & Subscriptions: Should’ve, Would’ve, Could’ve

By Tien Tzuo December 13, 2012

Tien-tzuo1By Tien Tzuo, CEO

 

Pandora has had a rough quarter. The popular music streaming service has seen its finances dissected across business journals, its business model questioned, and a very public campaign to amend copyright law mocked by recording artists.

 

Many believe that the solution to Pandora’s problems is to fight to lower the fees that artists get every time their song streams on Pandora. But fighting the artist for a fixed pie is clearly the wrong way to go.

 

Jonatha Brooke, a singer with several albums released both on major labels and independently, estimates that one million plays of her work on Pandora nets her a bit less than $500. If the legislation passes, she believes proceeds from the same number of plays could be less than $100. –Wall Street Journal, “The More Pandora Sells, the More It Loses” Dec 5, 2012

 

Arguing that artists like Ms. Brooke deserve less money is not a popular sentiment. And it’s also beside the point. Pandora shouldn’t try to squeeze more pennies out of its advertising dollars. Instead, what Pandora needs to focus on is getting more of its customers to pay. The company is falling for the same “people won’t pay for content” myth that almost destroyed the newspaper industry– at least until the New York Times, Wall Street Journal and News Internationals of the world challenged that myth and found that, indeed, people will pay for value.

 

Look at Spotify, for example. Both companies start with a freemium approach to content and then offer subscriptions. But while Pandora focuses on a dated advertising-based business model, Spotify focuses on the customer and monetizes its customer relationships through subscriptions. Spotify listeners convert to paying customers at a significantly higher rate than Pandora– Spotify made 83 percent of its revenue from subscriptions while reportedly nearly 90% of Pandora’s revenue comes from advertisements.

 

So while both companies are saddled with the same royalty problem, Spotify is in much better shape because its desire to have customers pay has forced it to deliver innovations that benefit the customers — offering multiple pricing tiers, subscriptions for differing tastes, as well as music on demand: users get to choose what songs they hear and when. Spotify’s campaign to convert freemium users to paying customers has also pushed it to better utilize social media; for example, by cleverly integrating its product into Facebook.

 

Moreover, Spotify has wisely capped the number of hours one can listen to its music for free. You want to keep listening? You pay. And increasingly, Spotify users are paying because they believe in the value of the product.

 

Pandora can keep lobbying Washington and seeking new advertiser revenues. But what the company really should be doing is seeking to build valuable customer relationships, punctuated by subscriptions. Only then will it have a sustainable business model.