What’s Really Behind Pandora’s Ad-Free Day

Pandora has announced that it will celebrate it’s 10th anniversary on Wednesday September 9th with a day that’s free of ads for its freemium tier. While many will look at what’s being called “Listener Love Day” as a nice gesture to celebrate a decade in business, there may be more to it than meets the eye.

While a day without ads might give Pandora’s freemium listeners (who make up 95% of its active users) a sample of what the premium paid-subscriber tier is like, it can also be viewed as an all-out effort to get at least some of those users to finally buy in.

Pandora currently has about 250 million subscribers but only 80 million are active, according to the company’s own numbers. Of those, just around 4 million, or 5%, have chosen the $4.99 per month ad-free premium tier (and many of them subscribed at the previous $3.99 level). This ratio has been surprisingly steady throughout its history, and the service hasn’t proven that it has the ability to up the conversion rate.

What’s even more out of balance is that those 5% of paid subscribers are responsible for just over 20% of Pandora’s revenue for the first half of 2015, according to the company’s Q2 financial statement.

In comparison, Spotify has around 75 million users and about 20 million are subscribed to the paid tier, which is more than 26% of active users. Those subscribers are also willing to pay twice as much at $9.99 per month. Read more on Forbes.

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The Labels Hate The Free Streaming Tier, But That’s Not The Problem

From various reports, the major record labels would like to eliminate the free tiers of on-demand streaming services like Spotify, a feeling that’s for once united with their artists as well. According to a post on Rolling Stone, the labels want faster revenue growth and feel that unless some adjustments are made to the freemium model, streaming revenue will never offset the death spiral of the CD and download.

Here’s the problem with eliminating or crippling the free tier though; the genie’s out of the bottle, the horse has left the barn and the ship has already sailed. A whole generation (the very generation that consumes the most music) already feels that music should be free, and they’re going to find a way to get it for free whether the major labels and artists like it or not.

Consider the fact that the computer networks of some of the most powerful corporations  in the world are hacked on a daily basis, and that our own government can’t seem to eliminate the formidable social media presence of ISIS, and you see the problem at hand. Streaming has made music piracy a footnote, but there are lots of clever hackers out there that can bring it back again with a roar if those free tiers are either done away with or severely restricted.

Yes, everyone would like the paid tiers of the various streaming networks to increase subscriptions more rapidly, but that part of the business is growing at a pretty good pace already, having increased 26% in the U.S. last year according to the RIAA.

The fact is, the biggest impediment to streaming revenue growth is because of the price barrier of the paid tier, which hovers around $10 per month or $120 per year for most of the major streaming services. The problem is that the average music consumer is comfortable paying no more than half that, with the average now right around $48. What we have here is a bad price point. Read more on Forbes.

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