To be clear, Pandora is making the change for those streaming free ad-supported music to their mobile devices. Pandora users in the U.S. will now be limited to just 40 hours of free ad-supported streaming on their mobile devices each calendar month, after which they’ll have to pay a in-app fee to continue listening.
The reason for the change isn't just the bottom line. It is, but it's also due to a large increase in the royalties that Pandora must pay. Pandora CEO Joe Kennedy said:
Our royalty rates have increased more than 25 percent over the last three years, including a 9 percent increase in 2013 versus 2012. What we’re trying to do is manage those royalty costs with a minimum amount of listener disruption.This change will not affect those streaming music to their laptops or desktops. The 40-hour per month restriction applies specifically to mobile devices. It also -- naturally -- does not affect users who pay for Pandora’s subscription service, Pandora One.
We’re conscious that those royalty rates are scheduled to go up another 16 percent over the next couple of years. So we're trying to be very balanced. We want people to continue to listen to and enjoy Pandora. We hate to bring any limit to that listening, but think that this is really a balance that we need to maintain.
Notably, Kennedy said that the average Pandora user on only listens for 20 hours across all platforms, not just mobile. Based on that, Kennedy said that the change should only affect 4 percent of Pandora’s monthly active listeners.
When a listener reaches 85 percent of his or her monthly allotment time, they will be notified so they can determine how best to manage the remainder of their bandwidth. Once a user hits the 40 hour cap, they can, if they like, make a $0.99 in-app purchase in order to keep listening on their mobile devices for the remainder of the calendar month. Based on that statement, it doesn't matter how much bandwidth is used by an end user after the $0.99 is paid.
In comparison, Pandora One, the company's subscription service, costs $3.99 a month. Thus, even with a cap, the free service is cheaper than Pandora One.
In its early days, back in 2009, Pandora had a similar cap for Web users. It was also a 40 hours-per-month limit, but at the time, desktop monetization was less mature, and Pandora was under royalty pressure.
However, because Pandora had a lot of heavy at-work listeners then, that cap affected 10 percent of users, as opposed to Pandora's estimate of 4 percent for the new cap. Those users could churn through time quickly, as they would typically start listening at 9 a.m. daily, and continue listening until 6 p.m. when they left.
There isn’t quite that use case here. So, it’s a smaller set of people that will be affected.It's possible, he said, that when mobile monetization matures, they may be able to reverse the cap, as they did with desktop.
Pandora’s 40-hour cap on mobile streaming begins March 1.