Tim Westergren, co-founder of Pandora Media Inc. (Photographer: David Paul Morris/Bloomberg)
Pandora has announced that it will celebrate it’s 10th anniversary on Wednesday September 9th with a day that’s free of ads for its freemium tier. While many will look at what’s being called “Listener Love Day” as a nice gesture to celebrate a decade in business, there may be more to it than meets the eye.
While a day without ads might give Pandora’s freemium listeners (who make up 95% of its active users) a sample of what the premium paid-subscriber tier is like, it can also be viewed as an all-out effort to get at least some of those users to finally buy in.
Pandora currently has about 250 million subscribers but only 80 million are active, according to the company’s own numbers. Of those, just around 4 million, or 5%, have chosen the $4.99 per month ad-free premium tier (and many of them subscribed at the previous $3.99 level). This ratio has been surprisingly steady throughout its history, and the service hasn’t proven that it has the ability to up the conversion rate.
What’s even more out of balance is that those 5% of paid subscribers are responsible for just over 20% of Pandora’s revenue for the first half of 2015, according to the company’s Q2 financial statement.
In comparison, Spotify has around 75 million users and about 20 million are subscribed to the paid tier, which is more than 26% of active users. Those subscribers are also willing to pay twice as much at $9.99 per month.
Pandora is also hampered by how big it can grow its audience, since it’s limited to a territory of North America, Australia and New Zealand by the Digital Millennium Copyright Act. That’s why a higher conversion rate is a must if the company is ever going to be profitable.
With high content costs in the form of royalties paid to record labels, artists, songwriters and publishers (which are likely to increase in the future), the company’s best hope for turning an ongoing profit is to convert more of its free subscribers into paid subscribers.
Giving them a one day taste of what that level of service seems like it may be the best way for that to happen. If it doesn’t go as planned though, the next question is going to be “What now?”
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