Faced with ever-rising music licensing fees, music streaming service Pandora has implemented a 40-hour per month limit on free mobile listening - a small change that has large implications on the state of music delivery services.
The reason for the listening cap, according to Pandora cofounder Tim Westergren, is due to the increase in per-track royalty fees, which "have increased more than 25% over the last 3 years, including 9% in 2013 alone and are scheduled to increase an additional 16% over the next two years."
Westergren's blog entry detailing the new policy was succinct and to the point. Emphasizing that this change would only effect less than 4% of Pandora's monthly listeners, Westergren also took the opportunity to point out that computer users would be unaffected by the change, and that listeners were more than welcome to sign up for Pandora's paid subscription services.
Investors took note of the announcement too, with Pandora's stock down as much as 6.5% percent just prior market opening this morning. (Though that dip was shallowing out to less than 1% by the time this story went to press.) The listening cap, and Westergren's alternatives have revealed the continuing weak spot for online services: generating revenue on mobile platforms.
Blame Mobile, Again
The reason Pandora can continue offering free, unlimited and ad-supported music on computers is simple: there's enough ad space shoved at free listeners' eyeballs that will, along with the audio ads, cover the costs of those royalty fees. But on mobile, audio ads are about all Pandora can put in front of their listeners. You could increase the frequency of ads, of course, but that would likely lead to less listeners than more paid listeners.
Cracking the mobile puzzle is very much an enigma for online services, because the form factor and use of many mobile devices preclude the type of ad displays and other revenue generators that worked on PC platforms. It is especially difficult for music services that, unlike social media services that have their content created by the very users they serve, have to come up with fixed licensing costs to broadcast music tracks.
While Pandora may take a bit of hit from this move, a smart trimming move like this should help weigh in costs and not irk users too much. Other services may see some migration from Pandora in the near-term, but those services are likely to be in the same boat and may have to implement similar moves of their own.
Music is expensive and mobile is a revenue suck. This combination is a bad playlist for companies like Pandora, until they can figure out a better mix.