Pandora and the Freemium Case Analysis

Topics: Business model, Music Genome Project, Subscription business model Pages: 5 (1730 words) Published: August 27, 2012
Pandora currently has over 80 million users in the United States and adds nearly 600,000 new subscribers every week. They also dominate the internet radio market segment with over 50% of all internet radio hours being listened to on the internet being done at Pandora’s unique music listening system allows users to select a favorite musician, genre or class of music and using specialized computer algorithms, create a personalized radio station that not only plays the music the user selects, but also closely related music by different artists. These algorithms have over 400 identified factors to help classify songs, and select appropriate matches based on a user’s particular interest.

In 2005 Pandora was launched as a premium music service, streaming musical content for a price. The content usually came with free introductory offers, followed by monthly and annual subscriptions. At the time this business model was risky considering “over 80% of online music was downloaded from peer-to-peer (P2P) networks for free.” (Laudon & Traver, P. 371) For a couple years Pandora struggled to find the best business model. In 2006 they added an ability to immediately purchase the music they heard on Pandora, followed by an iPhone app that brought 35,000 new users every day. The app introduced a “free” ad-supported model that attracted over 20 million users. These new models and company additions came with varying levels of restrictions by the music companies that own the music. They restrict the ability to request a single song on demand, no replaying songs and a limitation on how many times a song on an individual station could be skipped per hour. In 2009, Pandora, while still struggling to solidify their business model, added a new ultra-premium music service called Pandora One. Utilizing this service dropped many of the traditional restrictions and annoyances associated with traditional Pandora use, but still expensive by internet radio standards. Pandora had acquired tens of millions of users during the first 4 years in business, but struggled each year to be profitable. However by 2009 Pandora, through a combination ad-support, premium service and user subscriptions had finally reached their first profitable quarter ever. The very next year Pandora reported that it was not only profitable, but had doubled revenue to over $137 milllion in less than a year. It appeared that Pandora was finally figured out a revenue model that worked the freemium business model.

“Pandora’s first business model was to give away 10 hours of free access to Pandora, then ask subscribers to pay $36 a month, for a year after the 10 free hours were used up.” (Laudon & Traver, P. 371) The result was a failure; people loved the music service, but simply did not want to pay for it. Facing serious financial issues Pandora attempted an ad-supported model that allowed multiple subscription options. The model evolved further with the addition of iPhone app, which added millions of “free users” with ad-support. Pandora evolved into the freemium business model and it makes sense for companies like Pandora, where the cost of the music is close to zero.

The value proposition for Pandora customers is the ability to personalize the musical listening experience and Pandora’s ability to cater to the individual listening desires of each one of its users, due in large part thanks to their infrastructure and specialized algorithms created by the Music Genome Project and the original founders of Pandora. Customers also enjoy the convenience and ease of use that Pandora offers. Customers can get high quality music content streamed directly to their computer, smart-phone, tablet and other web enabled devices anywhere they have cellular reception or a web connection. Pandora has benefited from the U.S.’s natural shift toward smart-phones and constant web connected devices in that their delivery method costs are reduced. Customers are not required to buy a...
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