NEW YORK (TheStreet) -- Early in 2013, Pandora (P - Get Report) instituted a 40-hour listening cap on mobile devices. While short-lived, it served its purpose -- to moderate listener hours and reign in content costs a bit.
I won't bore you with the wonky details, but, internally, Pandora looks at how it monetizes paid versus free listeners. As the company built out its sales infrastructure (e.g., adding sales people, securing integration into radio ad buyers' systems), it achieved and continues to achieve its monetization goals vis-a-vis free listeners, eliminating the need for the cap. In Pandora: The Definitive Look Back and Look Ahead, I lay out numbers that support this notion.
Mobile revenue up 58% year-over-year. Music royalties now account for less than 50% of revenue. I dig deeper into the numbers in the above-linked article, but the point is that constantly improving monetization led to these numbers and, in turn, Pandora lifting the cap.
This look back applies to the present day as I aim to provide a better understanding, not only of Pandora, but Internet radio in general.
One other outcome of Pandora's mobile listening cap was a 114% year-over-year increase in subscription revenue.
This might lead you to believe, intuitively, that Pandora would see the triple-digit pop and go for broke trying to add subscribers. But, as I detail in a recent article that explains exactly what Pandora's strategy is, that's not the business model.
While Pandora cares about its subscription business -- I understand they recently put the guy who built the World of Warcraft sub biz in charge of it -- it's never going to be more than 20% of revenue. And that comes straight from sources within the company.
Because, again, the goal is to build scale with a free product to service the objective of making money via advertising. Basically beating broadcast radio at its own game, but with a dynamism the traditional radio guys can't possibly match because of the medium's inherent limitations (e.g., the delivery mechanism, lack of data).
Spotify, in many ways, takes the opposite approach. It gives users a free taste of its service with the hopes of converting subscribers. While I know Pandora respects what Spotify has accomplished, I also know the company just doesn't believe in being a pure subscription play.
With that we can begin to understand the reality that Pandora and Spotify are not competitors in the direct sense of the word.
In fact, Spotify CEO Daniel Ek laid it out with as much clarity as humanly possible in a recent interview with Hollywood Reporter:
Hollywood Reporter: Pandora is a well-known brand, with 76 million users in the U.S., Australia and New Zealand. Spotify had 24 million active users worldwide as of March. How can it compete?
Ek: I don't really view them as a competitor. The rest of the world seems to, for some reason. We want Spotify to be your music player. We don't want to be the radio service; we don't want to be the place where you watch a music video and then a cat the next moment. We want to be the place where you store and collect, where you build your playlist for your dinner party or your workout. That is very different from Pandora.
He hits it from a product/user experience standpoint. And nails it. But Ek's comments ultimately extend to the treatment, re: free versus paid, I gave the comparison in this article.
--Written by Rocco Pendola in Santa Monica, Calif.