Pandora Internet Radio has just announced that it will cap its ad-supported listeners at 40 hours per month in order to combat rising royalty costs. If you dig deeper, however, it seems the real problem is that Pandora isn’t converting enough listeners to subscribers. This problem likely stems from its user experience; Pandora gives you too many reasons to stop and think before letting you subscribe. It doesn’t do a great job of monetizing impulse scenarios that actually result in high levels of satisfaction. Direct operator billing could provide a way to help Pandora expand its sales of paid offerings.
There are now two paid scenarios for Pandora users. You can subscribe monthly to ad-free listening for $3.99, or, if you exceed your 40 hour cap, you can pay 99 cents for ad-supported listening for the rest of the month. That’s it. If you choose to subscribe, at least via iPhone, Pandora will bill you through your iTunes account. Using that existing payment structure is good, but it’s a multi-step process. The way it’s presented gives you too many reasons to stop and think. Where’s the impulse buy?
Consider this scenario – my daughter is listening to Disney music. She only wants princess songs. She likes to skip from song to song. She doesn’t want ads to interfere with her Princess music surfing. Would I pay 99 cents if I could touch one button, have the 99 cents charged to my mobile bill, and let her enjoy herself for the next few hours? I sure would. Heck, I’d probably do that a few times a month without thinking about it. When my bill came at the end of the month and i’d spent 5 or 6 bucks, i’d probably say, “hey, time to just subscribe to Pandora.” Instead, I won’t subscribe, because there are too many steps in the process that keep reminding me I’m about to pay for something I otherwise get for free.
I suspect that if Pandora went to direct operator billing, created more paid scenarios, and enabled one-touch payments it would not only generate more paid transactions, but would also encourage more users to subscribe. Doing so wouldn’t nickle and dime anyone, because you could still listen to ad-supported music for free. It would just add the value of ad-free listening to more situations.
Think about it – you’re having a dinner party and you want ad free Pandora that night. You’re on a road trip and you’d like ad free listening for a few hours. Your four year old will not go to sleep without hearing Ariel, Belle, and Pocahontas sing for her. Add enough of these up and the business case for a monthly subscription becomes self-evident. But given the always-paid or always-free scenario they have today, most users choose not to subscribe. That’s why rising royalty costs are hurting the company.
While direct operator billing isn’t the whole solution, it’s part of it. The immediate, real-time nature of the direct-to-bill charge would enable impulse purchasing. It would make Pandora much more responsive to the situations in which its listeners find themselves. Ultimately, this is really a product definition problem for Pandora. But its product definition could be massively enhanced if it adopted the kind of seamless, one-touch charging direct operator billing can enable. I’m willing to bet this is one of those situations where they’d actually get more people to pay them more than $3.99 every month, and yet would find more customers were happier with their service.