What Is The Significance Of Pandora’s Probable Entry Into The On-Demand Music Domain?

-2.14%
Downside
8.38
Market
8.20
Trefis
P: Pandora Media logo
P
Pandora Media

Taking an important step to make its business model more sustainable, Pandora is about to launch its on-demand streaming service. According to The Wall Street Journal, the Internet radio company is in the process of finalizing agreements with major record companies, that will grant Pandora the right to play their music (on-demand) in the U.S. and abroad. The launch of on-demand streaming will position Pandora somewhat closer to its counterparts such as Apple Music and Spotify. However, in terms of content, Pandora with its two million song library, will remain leagues behind Spotify, which currently dominates the market. Nevertheless, this is a much needed step in the right direction that should help Pandora diversify its business model.

Pandora has traditionally relied on advertisements for a bulk of its revenues, which haven’t been enough to counter its burgeoning content and sales & marketing costs. Although the Internet radio company did have the subscription side of the business, its limited song library along with radio station format of listening (unavailability of on-demand music) could never really convince users to pay for ad-free services. However, for the on-demand service, Pandora is looking to launch a $10/month subscription plan that will provide users unlimited access to around 10 million tracks, as opposed to the existing service where only different types of music stations are available. With the on-demand service, the company can hope to bolster its subscriber base, thereby increasing its monetization.

While the on-demand streaming service could potentially accelerate Pandora’s revenue growth, it will come at a significant cost. During its years of operation, the company didn’t need permission from record labels to play their music because of the absence of on-demand music. Instead, the company just needed to pay the royalty rates set by the Copyright Royalty Board. However, since Pandora has to strike deals now, it would have to pay these record labels additional money to obtain rights for their music. In fact, several record labels may be reluctant to let their content go beyond Pandora’s current markets – U.S. and ANZ (Australia and New Zealand), because they may not have control over what portion of their music Pandora would put in its free tier. Hence, they may look to strike deals favorable to them, which means that the Internet radio company may have to shell out even more money.

Relevant Articles
  1. Can Pandora End The Year On A Strong Note After Solid Q3?
  2. Is SiriusXM Paying The Right Price For Pandora?
  3. How Will Subscriber Growth Drive Pandora In The Second Half Of 2018?
  4. Can Subscriber Growth Drive Pandora’s Q2?
  5. Spotify Has Seen A Big Rally, But Still Faces Some Challenges
  6. How Much Can Pandora Benefit From Snapchat Partnership?

Pandora’s efforts to increase its revenue growth have invariably been accompanied by almost a proportional increase in expenses, which is why it has been unable to become profitable. While the company would have to incur additional expenses this time around as well, the launch of on-demand music could play a pivotal role in taking Pandora towards profitability. Granted, it would be difficult for the company to compete with the likes of Spotify and Apple Music, but Pandora is on its way to transition into a formidable force. The company could leverage its enhanced content (through contracts with record labels), $5/month ad-free subscription that allows song skipping, and its $10/month subscription, to increasingly convert free users into paying subscribers.

Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap |More Trefis Research