How Pandora’s On Demand Service Can Be More Profitable Than Advertising
Internet radio major, Pandora (NYSE: P), has recently launched Pandora Premium which is its on demand music service. This has been another step to attract users to subscribe to Pandora’s services as only 4 million out of Pandora’s 80 million active users pay for their services. However, free users, too, contribute to the revenues of Pandora indirectly, but only in the form of advertisements. Pandora has relied on advertising as its primary source of revenues which has not been very profitable for the company as the cost of content acquisition has been over 50% of the revenues from advertising.
On Comparing the cost of content acquisition of Pandora’s advertising division with the expected cost of content acquisition of Pandora Premium’s subscription, it turns out that the new on demand service launched by the company will be more cost effective and profitable as an average subscriber will have to play a very high number of performances per day to cost the same, i.e. 50% of the subscription revenues.
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So on average, Pandora Premium’s subscribers will have to play 75 performances per day to bring the percent cost of content acquisition equal to that of the advertising division. Average usage for Pandora’s active user per day is 34 minutes. Therefore, it is highly unlikely that users will play 75 performances in 34 minutes on a daily basis. So, the actual number of performances per day by users will be far less than 75, which will cost considerably less than 50% of the Pandora Premium’s subscription revenues.