Question

Case

Pandora is the Internet’s most successful subscription radio service. In May 2014, Pandora had 77 million 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 Pandora is so popular. Users are able to hear only the music they like. Each user selects a genre of music based on a favorite musician or vocalist, and a computer algorithm puts together a “personal radio station” that plays 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.

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 and online 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 model was to give away 10 hours of free music and then ask subscribers to pay $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, in November 2005 Pandora introduced an ad-supported option. In 2006, Pandora added a “Buy” button to each 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 vast majority opting for the free service with ads. In fiscal 2013 Pandora’s total revenue was $427.1 million, of which $375.2 million (88 percent) came from advertising.

Pandora has been touted as a leading example of the “freemium” revenue model, in which a business 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 is 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 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 (indicated by thumbs up or down on the Pandora site) and “skip this song” requests, as well as data about which device people are using to listen 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.

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 music labels. Pandora’s royalty rates are less flexible than those of its competitor Spotify, which signed individual 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 currently allocated 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.

CASE QUESTION:

What type of e-commerce is Pandora? What is Pandora’s ecommerce business model? Explain your answer?

Answer 1

E-commerce is Pandora

E-commerce is tied in with selling items or services by means of the internet, web, and mobile applications and how businesses create value from sales. Based looking into its study, Pandora is considered the Internet's best radio service. Pandora permits users to discover new music that matches their tastes. This service does not let users choose the specific songs they need to listen to, but instead discovers songs that are musically like their favorites. One of the characteristics that I think Pandora differentiates from other competitors is personalization and customization. Pandora offers a unique customer value recommendation utilizing the idea of a 'personal' radio broadcast playing your sort of music from mobile, web, or tablet. This creates a radio broadcast specially tailored to the type of music you like and need to hear at that moment. Unlike the competitors, users can likewise explore new songs that they might not have heard in the same genre. Furthermore, Pandora users can customize their personal radio broadcasts by offering a go-ahead or disapproval to songs that are recommended to them.

Pandora’s e-commerce business model

After Pandora failed to attempt several other business model choices, they decided to use the membership revenue model with a freemium strategy, which they are utilizing today. The organization gives away a certain level of item or services for free, yet then charges a membership fee for premium levels of the item or service. With this strategy, the essential service is available for everyone for free, however with exacting constraints in data transfer capacity and promotions between songs which results in a lower quality listening experience. Personally, I don't like to listen or watch the promotions when I listen to music so I would pay for the premium level which is simply $36 every year Pandora is an example of the "freemium" business revenue model. The model is based on parting with some services for free to 99% of the customers, and relying on the other 1% of the customers to pay for premium versions of the same service. As I would like to think, Pandora understands the customer's need very well and use the privilege freemium strategy because there is a very low negligible expense to help free users. Freemium likewise works when a business can be supported by a number of customers who will pay.