In amongst all the recent debate over freemium and paid subscription music services, there’s been little said by rights-holders or digital platforms about the ‘middle ground’ – micro-transaction models or reduced price points that may appeal to more mainstream consumers.
In his now-famous castigation of Deezer and Rdio’s freemium tiers, Ministry Of Sound boss Lohan Presencer made mention of this, commenting that he wanted to see “clever alternative payment mechanisms that allow people to snack, that allow them to pay as they go”.
And industry analyst Mark Mulligan has long called for more experimental pricing by streaming services (as evidenced by his new piece, ‘The Case For A Freemium Reset’).
Now it appears one leading digital player is ready to have a crack at micro-billing.
Pandora might not be the most beloved streaming partner of the music industry, but its signalled its intention to start experimenting with a ‘snacking’ price point.
Talking in a call to investors earwigged by MBW, Pandora CFO Mike Herring [pictured] was asked what would be next for the personalised radio company’s business model.
He said that Pandora had started discussing at length the idea of moving its tanks into Spotify, Deezer and Rdio’s territory – by offering consumer ‘a la carte’ options.
The most favoured next move, it seems, is for Pandora to offer users the chance to buy 24 hours of ad-free radio for 99 cents.
“[This will work] if you’re having a party and you… just want to play Pandora but you don’t want the ads to show up over the loud speaker when your guests are in the house, or during thanksgiving dinner or something,” said Herring. “So we’re looking at ways of supplementing [our] ad business.”
“[24 hours ad-free for 99 cents] is if you just want to play pandora at your party and don’t want the ads to show up over the loudspeaker.”
Although the CFO reiterated that Pandora’s biggest growth opportunity remained in advertising, he also opened up on whether Pandora would ever directly take on Spotify with an ‘all you can eat’ streaming service that allowed users to choose each track they wanted to hear.
“There’s definitely a portion of listeners that seek out on-demand,” he said. “Spotify has seen very strong growth in that business. That a la carte type of music, where you pick your playlist or pick a specific song, is a different type of music listening [to Pandora].
“We currently don’t address that at all. Could we somewhere down the line? It’s certainly possible. It hasn’t been a priority because we think the market opportunity is much bigger in the ‘lean back’ [consumer]. 80% of music listening today is radio listening.
“We currently don’t have the licenses [for a la carte]. So even if we wanted to, we couldn’t. But there may be an opportunity there somewhere down the line.”
Herring revealed an interesting conundrum for Pandora: while music rights-holders are desperate to see the likes of Spotify push their free consumers towards paying a subscription, Pandora’s model means its owners would rather see the opposite take place.
Subscribers to Pandora One – the company’s premium tier – aren’t given the option of choosing the music they’d like to hear, but do get ad-free listening experience.
“The problem with subscription for us is that it attracts our heaviest listeners, and can eventually make them unprofitable.”
“The problem with subscription is that it tends to attract our heaviest listeners, and the heaviest listeners can eventually be unprofitable,” said Herring. “It’s about a 72 hour break-even period. So even though the revenue-per-use is higher, the profit per user – because the licensing costs are so significant – is a balancing act.
“We do a lot of trade-offs between advertising and subscription business in order to optimise for revenue and for profit. As we look to the future we think there are significant opportunities to add more more price points and add more products in order to optimise the business. We don’t think two price points is enough – you need a portfolio of products. There are a lot of people at Pandora, including myself, who have significant backgrounds in consumer subscription and those businesses. We like the way those economics work.”
As you’d probably expect, Herring used the call to grumble about the licensing costs that are currently hammering Pandora’s business. Although on average Pandora is only paying out around $0.0014 per streamed track to rightsholders, the firm’s total payments to labels and publishers in FY 2014 stood at $446.4m – close to half of its total revenues of $920m.
“We have very high and significant licensing costs,” said Herring. “You probably see a lot of the discussion in Washington with ASCAP, BMI and SoundExchange… Whether we sell [ad] revenue or not we’re going to pay this. We at least have to get $20 per 1,000 [listener] hours just to cover our basic music licensing costs. We’re the highest-paying form of radio in the world.”
Pandora is currently involved in two battles over the statutory rates of its royalty payouts: one with the publishers, represented by ASCAP and BMI, and one with SoundExchange.
“We currently don’t have the licences for a [Spotify-style service]. But there may be an opportunity there down the line.”
The latter revolves around a decision from the US’s Copyright Royalty Board later this year, which will determine Pandora’s rate until beyond 2020.
Pandora is attempting to bring down the average stream payout rate to $0.0011, while SoundExchange is demanding a move to $0.0025.
“We expect licensing rates will likely stay where they are,” said Herring. “There’s been a lot of action in markets for those on-demand services, where the licensing rates are much higher… as Spotify re-negotiates their next set of rates. [But] Washington’s having a hard time getting anything done – I don’t expect copyright reform to jump to the top of that list.”Music Business Worldwide
