question archive Pandora is the Internet’s most successful subscription radio service
Pandora is the Internet’s most successful subscription radio service
Subject:Computer SciencePrice:2.87 Bought7
Pandora is the Internet’s most successful subscription radio service. In May 2014, Pandora had 77million registered users. Pandora accounts for over 9 percent of total U.S. radio listening hours. The music is delivered to users from a cloud server, and is not stored on user devices. It’s easy to see why Pandorais so popular. Users are able to hear only the music they like. Each user selects a genre of music based ona favorite musician or vocalist, and a computer algorithm puts together a “personal radio station” thatplays the music of the selected artist plus closely related music by different artists. The algorithm uses more than 450 factors to classify songs, such as the tempo and number of vocalists. These classifications, in conjunction with other signals from users, help Pandora’s algorithms select the next song to play. Usersdo not control what they hear. People love Pandora, but the question is whether this popularity can be translated into profits. How can Pandora compete with other online music subscription services andonline stations that have been making music available for free, sometimes without advertising? “Free”illegally downloaded music has also been a significant factor, as has been iTunes, charging 99 cents per song with no ad support. At the time of Pandora’s founding (2005), iTunes was already a roaring success.
Pandora’s first business model was to give away 10 hours of free music and then ask subscribers topay $36 per month for a year once they used up their 10 free hours. Result: 100,000 people listened to their 10 hours for free and then refused to pay for the annual service. Facing financial collapse, inNovember 2005 Pandora introduced an ad supported option. In 2006, Pandora added a “Buy” button toeach song being played and struck deals with Amazon, iTunes, and other online retail sites. Pandora now gets an affiliate fee for directing listeners to sites where users can buy the music. In 2008, Pandora added an iPhone app to allow users to sign up from their smartphones and listen all day if they wanted. Today,70 percent of Pandora’s advertising revenue comes from mobile.
In late 2009 the company launched Pandora One, a premium service that offered no advertising, higher quality streaming music, a desktop app, and fewer usage limits. The service costs $4.99 per month. A very small percentage of Pandora listeners have opted to pay for music subscriptions, with the vastmajority opting for the free service with ads. In fiscal 2013 Pandora’s total revenue was $427.1 million, ofwhich $375.2 million (88 percent) came from advertising.
Pandora has been touted as a leading example of the “freemium” revenue business model, in which abusiness gives away some services for free and relies on a small percentage of customers to pay for premium versions of the same service. If a market is very large, getting just 1 percent of that market to pay could be very lucrative— under certain circumstances. Although freemium is an efficient way of amassing a large group of potential customers, companies, including Pandora, have found that it challenging to convert people enjoying the free service into customers willing to pay. A freemium model works best when a business incurs very low marginal cost, approaching zero, for each free user of its services, when a business can be 3 supported by the percentage of customers willing to pay, and when there are other revenues like advertising fees that can make up for shortfalls in subscriber revenues.
In Pandora’s case, it appears that revenues will continue to come overwhelmingly from advertising, and management is not worried. For the past few years, management has considered ads as having much more revenue-generating potential than paid subscriptions and is not pushing the ad-free service. By continually refining its algorithms, Pandora is able to increase user listening hours substantially. The more time people spend with Pandora, the more opportunities there are for Pandora to deliver ads and generate ad revenue. The average Pandora user listens to 19 hours of music per month.
Pandora is now intensively mining the data collected about its users for clues about the kinds of ads most likely to engage them. Pandora collects data about listener preferences from direct feedback such as likes and dislikes and “skip this song” requests, as well as data about which device people are using tolisten to Pandora music, such as mobile phones or desktop computers. Pandora uses these inputs to select songs people will want to stick around for, and listen to. Pandora has honed its algorithms so they can analyze billions more signals from users generated over billions of listening minutes per month. Pandora is trying to figure out when people are listening in groups such as car pools and dinner parties, which might justify Pandora charging higher prices for songs heard by groups rather than single
3
individuals.
The company is looking for correlations between users’ listening habits and the kinds of ads that would appeal to these users. People’s music, movie, or book choices may provide insight into their political belief, religious faith, or other personal issues. Pandora has developed a political ad-targetingsystem that has been used in presidential, congressional, and gubernatorial campaigns that can use users’song preferences to predict their political party of choice.
As impressive as these numbers are, Pandora (along with other streaming subscription services) is still struggling to show a profit. There are infrastructure costs and royalties to pay for content from the musiclabels. Pandora’s royalty rates are less flexible than those of its competitor Spotify, which signedindividual song royalty agreements with each record label. Pandora could be paying even higher rates when its current royalty contracts expire in 2015. About 61 percent of Pandora’s revenue is currentlyallocated to paying royalties. Advertising can only be leveraged so far, because users who opt for free ad- supported services generally do not tolerate heavy ad loads. Apple launched its iTunes radio service for the Fall of 2013 that will compete directly with Pandora. ITunes radio has both free ad-supported options,and a subscription service for $25 per year, undercutting Pandora’s annual subscription fee of $60. Can Pandora’s business model succeed?
Q1. What business model does Pandora adopt? Explain how Pandora’s business model works.
Q2. What is Pandora’s business strategy? By applying Porter’s competitive scope, please describe what strategic position Pando has focused on?
Q3. What are the Strengths, Weaknesses, Opportunities, and Threats (SWOT) of Pandora?
Q4. Do you agree or disagree with the statement “Pandora has a sustainable competitive advantage”?
Purchase A New Answer
Custom new solution created by our subject matter experts
GET A QUOTE
Answer Preview
Answer:
Q1. What business model does Pandora adopt? Explain how Pandora’s business model works.
ANS:
As mentioned in the case earlier, Pandora works on the business model of “Freemium” revenue model. In this model, businesses give away some services for free and rely on some a small percentage of customers to pay for premium versions of the same service. For this model, one needs to have a large audience or a market. Because, to grow in the business, a business should have a huge base of potential clients that are converted from a larger base of customers. This business has a very low variable cost at which new set of services or additional services can be provided to the premium customers who are the sole generators of income. There should be a good word of mouth publicity from the end consumers since they are the ones who run the entire business model of revenue generation. Once a customer uses a freemium service, he needs to be using the service again, this will help in retaining the customers.
Q2. What is Pandora’s business strategy? By applying Porter’s competitive scope, please describe what strategic position Pando has focused on?
ANS:
Pandora highlights Competitive strategies can best be applied and where information systems are likely to have a strategic impact, some of them personalized music which Pandora provides search on basic of song title, artist name or genre so that it will quickly scan the entire music database and play music of searched criteria for the listener, it also has feature called “skip a song” which takes the listener’s preferences in music and codes an algorithm based on his preferences. This can also help Pandora manage their ads specific to the specified listeners based on their music and skipping preferences.
According to Porter’ competitive force model five competitive forces that shape up the future of any firm are traditional competitors, new market entrants, substitute products and services, customers and suppliers. When it comes to the case of Pandora, there have been many traditional competitors like iTunes and Amazon Music. To compete with them, Pandora has entered the market with its services in different forms on every aspect of the market by offering competitive pricing for advertisers and customer.
In this regard Pandora has proved its presence in the market way ahead of its competitors. Next, Pandora should deal with the threat of substitution in the music industry. Because music industry has always been a victim of piracy and technological advancements. Preferences of people based on the technological advancements change overnight such as traditional land-based radio, satellite radios and any internet music providers. Pandora provides the best content to its customers because their customers can select a select genre of music they like and they listen to only that particular kind of closely related music at Pandora. Suppliers in Pandora’s case, those who sell the rights to music companies like Sony and others, Pandora must pay for its customers’ playlists as a result it is disadvantages to have pay all the supplier’s royalties.
Q3. What are the Strengths, Weaknesses, Opportunities, and Threats (SWOT) of Pandora?
ANS:
Strengths:
The following are the strengths of Pandora:
- Customization – the ability to create up to 100 different stations
- Two subscription plans – a free one including advertising and a fee-based one without ads
- Versatility – Pandora on the web/mobile/music system at home
- Strong brand recognition – has become a generic benchmark
- Discovering artists that a customer has probably never heard of
Weaknesses:
The following are the weaknesses of Pandora:
- Competition from other music sources resulting in limited margins
- Limited global presence
- Highly priced than the competitors
Opportunities:
The following are the opportunities of Pandora:
- Applications supported by iPhone resulting in higher usage of premium customer base who intend to subscribe to Pandora
- Increasingly tech-savvy population
- Popularity of online music sources
- Advertising opportunities on Pandora’s website
- Establishing partnerships with car makers to bring Pandora services to vehicles
Threats:
The following are the opportunities of Pandora:
- Traditional radio stations
- Increasing reach and popularity of competitors
- Entry of players due to growing market
- Piracy
- Increasing licensing price of music label companies
Q4. Do you agree or disagree with the statement “Pandora has a sustainable competitive advantage”?
ANS:
Yes. Pandora has sustainable competitive advantage over its competitors in terms of providing selected and refined music based on the previous preferences of the listener. This will help in building the customer’s retention rate. Pandora also has ads that are broadcasted based on the preferences of the listeners, which could help the companies that advertise with Pandora gain their own market awareness.
