Will Pandora’s Music Limits Boost Revenue?

Ever since Pandora (NYSE:P) first went public in 2011, concerns for its ability to monetize its mobile platform have been simmering beneath the surface of the company’s long-term growth narrative. In late February — just eight days before its fourth-quarter earnings report, 3 months after the company provided a soft guidance for the quarter, and one day after founder Tim Westergren made a renewed appeal for Congress to pass the Internet Radio Fairness Act — Pandora announced that it would be reinstating a monthly listening cap for its mobile app.

Several months have passed since the Internet radio service announced it would be charging users 99 cents to continuing listening, and the company has reported that the 40-hour monthly mobile limit has cut music streaming and content costs as intended, while its audience has continued to grow. But growth did slow to some degree. In March, the first full month the cap was in place, Pandora streamed 1.31 billion hours of music, a 5.1 percent drop from February’s 1.38 billion, the company said in a statement emailed to Bloomberg Monday.

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“The decline in hours will be very closely mirrored in content acquisition costs,” Chief Executive Officer Joe Kennedy said in an interview, without providing specifics. The exact results will be apparent when the company reports fiscal 2014 first-quarter results on May 23. However, the figures that Pandora did release indicated that the listening cap has given the company a means to contain costs without alienating users. Yet, investors are still concerned that the fewer hours of use will sacrifice much-needed revenue, as Wedbush Securities analyst Michael Pachter told the publication.

“The hours are down sequentially,” said the analyst, who holds a neutral rating on the company’s shares. “A lot of that has to do with the mobile cap, which chased away some abusive users, but the company will still have some explaining to do.” While Pandora’s stock has gained more than 50 percent so far this year, share were trading down by as much as 4.7 percent at $13.99 on Tuesday afternoon.

Alongside Pandora’s increasing popularity, its royalty payments have ballooned. To stem its revenue losses, the company began looking for ways to further monetize the 4 percent of mobile users who were streaming more than 40 hours of music monthly. The solution the company settled on was the listening cap; mobile users who want listen to more than the cap allows can either switch to the desktop version, pay 99 cents to continue listening for the month, or purchase a $36-per-year commercial-free subscription.

Of those users who reached the limit in March, Kennedy said that 86 percent returned in April. Some users switched to Pandora’s unlimited desktop version, and some choose to pay, but the CEO did not give exact numbers. People found a way to make it work for them,” said Kennedy. “The vast majority found one or a combo of those methods worked for them.”

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The method is also working for Pandora. “We are getting what we wanted,” Kennedy said. “We’re seeing continued growth in subscribers and an impact on a small percentage of users that’s having a significant effect on content costs.” The company’s active users climbed to 70.1 million in April, a 3.5 percent increase from February’s 67.7 million and 0.9 percent gain from March. While Pandora’s share of the total U.S. radio listening market fell from 8.5 percent in February to 7.3 percent in April, the company’s number of active users increased 35 percent since April 2012.

You can follow Meghan on Twitter (@MFoley_WSCS) for the latest industry news.

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