"There's a small segment of the population that will pay the $120 per year."
Those are the words of Pandora (NYSE:P) CEO Tim Westergren at the MIDEM conference earlier this year. He was describing his goal to release an on-demand music service at a price below $10 per month.
But a report from The Wall Street Journal indicates that Westergren was unable to pull off the feat of persuading music labels to let it offer on-demand streaming at a price below the industry standard. Instead, it will beef up its current $5-per-month ad-free option with the ability to skip more songs and listen offline. That puts a lot of pressure on the company that analysts are expecting to get a big boost from on-demand streaming. It will have to take on Apple (NASDAQ:AAPL) and Spotify to win paid subscribers.
What's Pandora's competitive advantage?
Pandora had 78.1 million active listeners as of the end of the second quarter. Those users are all based in the United States, Australia, and New Zealand. Comparatively, Spotify operates throughout Europe, the Americas, and some Asian nations. Apple Music reaches even more territories, with a significant presence throughout Asia and availability in some African countries.
Pandora's 78.1 million listeners trail Spotify's 100 million. While it's more than Apple Music's 15 million subscribers, Apple also has more than 1 billion active devices and is closing in on 1 billion total customers.
So if Pandora can't compete on price, and it has a significantly smaller audience to sell into, what's it's advantage?
It has done a good job holding on to listeners even as services like Spotify and Apple Music emerged. Half of Spotify and Apple Music paid subscribers still listen to Pandora, according to MusicWatch analyst Russ Crupnick. Those listeners may prefer a unified platform for their music listening, and they've already shown a willingness to pay $10 per month for on-demand streaming.
There's a poor track record of converting listeners to paid subscribers
Those Apple Music and Spotify subscribers who also listen to Pandora represent a huge opportunity for Pandora, but the company has shown it's not proficient at converting listeners into paid subscribers. Fewer than 4 million people pay for Pandora's $5-per-month ad-free listening tier. That's just 5% of Pandora's total listeners. By comparison, about 30% of Spotify's listeners are paid subscribers.
Pandora will have to improve that rate if it hopes to compete with Apple Music and Spotify. That includes its ability to convert listeners who are already paying for one of its competing services, which should theoretically be easier.
User data might not be enough
Pandora likes to point to its listener data as a competitive advantage. Listeners provide simple feedback to Pandora as they listen. Combined with its Human Genome Project, Pandora's able to serve up continuous playlists of music its users enjoy.
But Spotify and Apple are quickly catching up on both the music recommendation engines and listener data. Spotify listener hours surpassed Pandora listener hours late last year, when the services had a similar number of listeners. Considering Spotify includes on-demand streaming, it provides a better signal of users' music preferences. Spotify's algorithmically curated Discover Weekly playlist has received tons of praise from its users.
Apple, meanwhile, benefits from the troves of data from its legacy iTunes service. It pairs this data with human-curated playlists to recommend music for its listeners.
That is to say, the Pandora user base that subscribes to Apple Music or Spotify may be difficult to convert even though Pandora already has a lot of listener data on them. And while there are still a lot of listeners who don't subscribe to one of those premium services, Pandora hasn't shown a great ability to convert them to paid subscribers. And as the CEO said himself, only "a small segment of the population ... will pay the $120 per year."