Is Pandora destined the same future as Hulu, charging us for content?
I love Pandora. It gets very close to the perfect, utopian radio experience: fresh selection of music you love with amazingly accurate recommendations mixed in. The more you use it, the smarter it gets about what you like. And it's portable across almost all devices.
But, like Hulu, I'm concerned they don't have a sustainable biz model yet. They've secured the rights to stream practically the entire commercial music library in exchange for giving back a percentage of revenues to the content providers. They make money from selling display ads in their apps and (supposedly) short audio ads (I've NEVER heard one). This is similar to Hulu's model for TV content. Pandora also has a premium account that gives paying customers more control over their music stream and other enhancements to the experience. Leaving their premium upgrade aside for now (I don't know how much % revenue that brings in for them), Pandora can't possibly make much money from their current ad products. I can't imagine how they will keep the content providers happy AND retain enough margin above streaming costs to build a large profitable business. They have the same fundamental problem that Hulu has: consumers have much less tolerance for commercials in on-demand content environments (or pseudo on-demand, like Pandora) as they do in the traditional, force-fed broadcast environments (radio and broadcast TV). As a result, Hulu makes just 1\3 the ad revenue per viewer episode of The Simpsons than Fox makes via broadcast and cable. Now I don't know this for sure, but my very strong hunch is that the same dynamic is at work for Pandora, if not worse. Display ads in streaming music apps? Come on! People plug Pandora in and walk away. No ads seen. And audio ads? Again, I have never once heard an audio ad and I listen to Pandora almost every day. Even if there were abundant audio ads, Pandora would still run up against the same problem Hulu has in dealing with consumer intolerance for disruptive ads in streaming content. I've probably listened to 1,000 songs streamed on Pandora and have never clicked on an ad or even heard an audio ad. That's not a business model that I'd bet on. Like Hulu, Pandora will have to go with a subscription model. And I will gladly pay for it!
