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.

QUESTION:

For Pandora, what business strategies are being supported by the use of data mining? Explain your answer.

Answer 1

Business Strategies :

Initially, the arrangement was to permit the Music Genome Project economically, yet when that was met with a lukewarm reaction, Pandora itself was established making the establishment for the music spilling administration we as a whole know and love.

In any case, that is not in any event, starting to expose what's underneath. As per Pandora's Chief Scientist and VP of Playlists (indeed, that is his genuine title), Eric Bieschke, takes note of that the setting of how, where and on what gadget the client tunes in to music are additionally part of finding their preferences.

Since Pandora is accessible on everything from vehicle sound systems to cell phones, the music individuals decide to tune in to at various times and on various gadgets can be profoundly unique in relation to one another. Bieschke clarifies that what you tune in to in the first part of the day at the rec center through your cell phone can be extraordinarily unique in relation to tuning in to music in the nighttimes when slowing down in the wake of a monotonous day. Pandora must fuse things like the hour of day to a client's listening inclinations and guarantee that the following melody on the playlist is one they'll adore.

Pandora's calculations likewise weigh various elements as indicated by the moves the client makes (or on the off chance that they make no move by any stretch of the imagination) when tuning in. The rarest and most significant bits of knowledge come as an "approval/disapproval". This basic activity immediaty affects the following melody you hear.

Basically skirting a tune, Bieschke clarifies, doesn't convey as much weight with the calculation, since the goal behind the skip could be anything from "I've heard this previously" to "I'm not in the disposition for this at the present time." However, in the event that you don't skip melodies consistently and, at that point begin to do so extensively, Pandora observes this and adjusts your playlist likewise.

A Deeper Look Behind the Scenes :

Pandora's first information researcher, Gordon Rios, spends a lot of his time understanding the complexities of AI and music proposals. Probably the most compelling motivation Pandora has remained so famous (particularly considering the approaching ghost of opponents like Spotify) is established in its straightforwardness.

Be that as it may, as indicated by Rios, there's a distinct exchange off. Usability can influence the intricacy of the information and how refined the information assortment techniques are. Luckily, Pandora has quite a long while of listening inclinations and qualities for each audience recorded and investigated. Its proposals are crucial to its prosperity, so a lot of time and exertion are filled making those suggestions as well as can be expected be.

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