Pandora Media, Inc (P +0.00%) took the opportunity to jump-start its new on-demand music service called Pandora Premium by launching during the same week as SXSW. Looking to maximize media coverage, the company had a full slate of bands that it sponsored, streaming live from Austin at the annual site of the conference where music, art, and new technology converge.
What is Pandora Premium?
Pandora Premium is the final product that completes Pandora's lineup. The first level of service is the original free ad-supported service; one step up is Pandora Plus, a $4.99-per-month ad-free offering; followed by on-demand Pandora Premium, priced at $9.99 per month.
Pandora Premium will is launching via a staged rollout beginning on March 15, with current ad-supported listeners offered a two-month free trial and Pandora Plus subscribers receiving a six-month trial offer. The service will be available to non-Pandora users in mid-April.
Image source: Pandora.
Do we really need another streaming music service?
Reviews of the beta product indicate that Pandora has created a better mousetrap with Pandora Premium. The product as reviewed by The Verge gives users a better discovery experience of new music and new artists.
CEO Tim Westergren highlights the difference in stating that the typical competitive product is a vault of 30 million songs that the user is left to navigate:
One of the reasons we're doing this is because we think people haven't done this right yet. Right now, subscription services are 30 million songs and a search box. It's the equivalent of handing somebody the keys to the record store and saying, 'Good luck!'
Pandora Premium utilizes the likes and dislikes of an individual user coupled with its categorization process known as the Music Genome Project to recommend specific artists and songs. The service optimizes the playlist based on a learning algorithm built into the Pandora platform that puts a priority on not only the music but also the order that the music is played.
Pandora is all about music discovery. Current users have already registered 75 billion thumbs into the company's database. When a listener upgrades to Pandora Premium, their entire history of musical preferences will go with them. This allows Pandora to start the new subscriber off with a rich history of songs to draw from.
The product also features offline mode. This allows the user to download playlists and songs and has become quite a popular feature introduced by the company with Pandora Plus.
What would it take to move the stock?
The rollout plan of free trials will create non-paying subscribers without any revenue. Over time users will either become paying members or decide not to upgrade to Premium.
Management feels that migrating current users upstream to the new higher-priced service will cost the company very little along the lines of customer acquisition costs. The company has a pool of 80 million active monthly users to draw from and expects to finish the year with 6 million to 9 million Premium subscribers.
We probably will not have commentary from the company other than numbers related to free trials and then conversion rates around those free trials in the short term. If Pandora management has underestimated user growth and upgrades guidance, I would expect to see the stock react positively. I do not expect meaningful data until the end of the third quarter.
The real question is whether subscribers from competing services such as Apple Inc.'s Apple Music or Spotify will switch to Pandora Premium. I am quite skeptical that this will occur, as there is no exclusive content on Pandora's product that a listener cannot hear on another service. People tend to develop habits. Pandora is so late to the game with its Premium product that though it may be a better platform, it is going to be tough to pull consumers away from a competitive service that they have become familiar with.
That leaves open the possibility of attracting completely new users -- people who do not subscribe to any streaming music service today. It is hard for me to see how Pandora's entry into the market provides a meaningful catalyst to get people streaming music in short order.
The bottom line
It's going to take time to understand if Pandora Premium will create a meaningful uplift in subscribers and revenue for the company. Initially, I would expect management to meet their projections for this year based on converting current Pandora users to the new Premium platform.
If we begin to see meaningful growth from new on-demand users or listeners from competitive services subscribing to Pandora, that would be a reason for shareholders to celebrate. For now, it is a wait-and-see game as, for the first time in its history, the company has a full suite of products available for listeners to choose from.
