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Pandora's New Plans Won't Be Enough

By Rick Munarriz - May 31, 2018 at 10:00AM

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The digital music pioneer hopes new family plans will help with premium customer retention.

Shares of Pandora (P) hit seven-month highs earlier this month, and the streaming music service is hoping to keep the momentum going by following its rivals into premium family plans. Pandora continues to be a streaming platform used primarily by ad-tolerating freeloaders, but giving families -- or friends huddling together in the guise of a family -- access to several streaming accounts for the price of less than two individual plans makes sense.

The new Premium Family Plan will set you back $14.99 a month, offering as many as six people under one billing account the features that are part of the Pandora Premium plan that goes for $9.99 a month. It's a deal that may seem too good to be true. Paying $14.99 a month for access to as many as six individual accounts that would cost $59.94 individually seems as if Pandora may be giving away too much, but there's a method to the markdown madness. Retention is stronger when you have several people relying on a platform. Pandora pricing the Premium Family Plan at a point where it's a strong value proposition even if it's just two people opens the offering's market to couples and small families. It's the right call, but let's not go thinking that this will move the needle. 

Pandora's app on a car dashboard.

Image source: Pandora.

When you're here, you're family

Pandora isn't exactly planting the flag with its new family bundle. Premium leaders Spotify (SPOT -2.67%) and Apple Music have been offering premium family plans for months. YouTube Music does, too. Retention is at the heart of the discounted group plan. The cutthroat nature of digital music where so many similar services are priced the same makes promotional activity for the sake of keeping existing members around a priority.

Pandora is doing a better job of getting more of its freeloaders to pay up. The stock soared earlier this month after serving up blowout quarterly results, and the big star in the report was a 61% spike in subscription revenue. Overall usage on Pandora is gradually contracting -- we're down to a multiyear low of 72.3 million active listeners, but the number of people paying for Pandora Plus or Pandora Premium is up to a record 5.63 million. 

Though the family plans will help, it won't have the same kind of impact that we've seen at Spotify, where the majority of its users are premium customers or Apple Music and YouTube Music where everyone's paying. Pandora needs these new plans to compete. However, it's not going to catapult Pandora into the same conversation where Spotify and Apple Music measure their premium listeners by the tens of millions. 

Pandora isn't just phoning it in, despite being late to both the family plan game and the $14.99 price point. It's introducing the Our Soundtrack feature where an auto-generated personalized shared playlist gets updated weekly for each family plan. It may seem like an odd and unnecessary feature, but it will help set it apart from the larger and established players. 

A few things are going right at Pandora. The defection rate is slowing. Organic revenue growth is improving on the strength of premium subscription gains. Investors shouldn't read too much into Pandora's new plans, but the new offerings won't derail its momentum. 

Rick Munarriz owns shares of Apple and Pandora Media. The Motley Fool owns shares of and recommends Apple and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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