Pandora is the Internets most successful subscription radio service. In 2013, Pandora had 71 million users. It

Fantastic news! We've Found the answer you've been seeking!

Question:

Pandora is the Internet’s most successful subscription radio service. In 2013, Pandora had 71 million users. It has been adding more than 1 million new subscribers a week—that’s one new subscriber every second. Pandora accounts for more than 70 percent of all Internet radio listening hours. The music is delivered to users from a cloud server, and is not stored on user devices.It’s easy to see why Pandora is so popular. Users are able to hear only the music they like. Each user selects a genre of music based on a favorite musician or vocalist, and a computer algorithm puts together a “personal radio station” that plays the music of the selected artist plus closely-related music by different artists. Users do not control what they hear, and cannot repeat a selection. The algorithm uses more than 400 factors to help classify songs. Like Taylor Swift? You can create a radio station on Pandora with Taylor Swift as the artist and you can listen all day to some Taylor Swift tracks as well as to musically-related artists such as Carrie Underwood, Rascal Flatts, and Anna Nalick.People love Pandora, but the question is whether this popularity can be translated into profits. How can Pandora compete with other online music subscription services and online stations that have been making music available for free, sometimes without advertising? “Free” illegally-downloaded music has also been a significant factor, as was iTunes, charging 99 cents per song with no ad support. At the time of Pandora’s founding (2005), iTunes was already a roaring success.Pandora’s first business model was to give away 10 hours of free music and then ask subscribers to pay $36 per month for a year once they used up their 10 free hours. Result: 100,000 people listened to their 10 hours for free and then refused to pay for the annual service.Facing financial collapse, in November 2005, Pandora introduced an ad-supported option. Subscribers could listen to a maximum of 40 hours of music in a calendar month for free. After the 40 hours were used up, subscribers had three choices: (a) pay 99 cents for the rest of the month; (b) sign up for a premium service offering unlimited usage; or (c) do nothing. If they chose (c), the music would stop, but users could sign up again the next month. The ad-supported business model was a risky move because Pandora had no ad server or accounting system, but it attracted so many users that Pandora was able to line up enough advertisers (including Apple) to pay for their infrastructure.In 2006, Pandora added a “Buy” button to each song being played and struck deals with Amazon, iTunes, and other online retail sites. Pandora now gets an affiliate fee for directing listeners to Amazon where users can buy the music. In 2008, Pandora added an iPhone app to allow users to sign up from their smartphones and listen all day if they wanted. This added 35,000 new users a day. By 2009, this “free” ad-supported model had attracted 20 million users. After struggling for years showing nothing but losses, Pandora finally gained some breathing room.In late 2009, the company launched Pandora One, a premium service that offered no advertising, higher quality streaming music, a desktop app, and fewer usage limits. The service cost $36 per year. By July 2010, this premium service had 600,000 subscribers, about 1 percent of Pandora’s 60 million users. At the end of 2009, Pandora reported $55 million in annual revenue mostly from ads, with the remainder coming from subscriptions and payments when people bought music from iTunes and Amazon. In 2010, revenue more than doubled to $137 million, with about $120 million coming from advertising, and $18 million from subscriptions. For 2012, revenue again doubled to $274 million, with about 87 ($239 million) percent coming from advertising and the rest from subscriptions and other sources.As impressive as these numbers are, Pandora (along with the other streaming subscription services) has yet to show a profit. It is unclear if streaming music is a viable business model for the recorded music industry. There are infrastructure costs and royalties to pay for content from the music labels. Pandora’s royalty rates are less flexible than those of its competitor Spotify, which signed individual song royalty agreements with each record label, and Pandora could be paying even higher rates when its current royalty contracts expire in 2015. About 61 percent of Pandora’s revenue is currently allocated to paying royalties, a rate comparable to music download stores and other subscription services. However, under Pandora’s royalty arrangements, the more music Pandora customers listen to, the more the company must pay out in royalties—royalty costs are not fixed.Pandora’s user base is huge, representing 7 percent of the total radio listening audience, but only a small percentage (about 2 percent) choose to pay for subscriptions. The vast majority continue to opt for the free service with ads. Nearly 90 per