Pandora Radio

Problem/Issue Statement

· Pandora is an Internet radio website where a user creates a profile than they can create stations based on a group or song that they like. A user has the ability to skip a song or give a song a thumbs up, but not the ability to request a song or play a song on demand. The major issue that Pandora faces is their ability to make revenue. They have a successful model as far as number of users, but they need to find a way to convert that into profit. 

Situation Assessment

· This problem is major in that Pandora won't be able to continue into the near future if they don't address the revenue issue quickly. Until this point they have gotten by with managing costs alone, up to and including not paying employees for a time period, however to keep the business up and running they need to turn a profit. Since users can't play a song on demand they are able to manage licensing fees, but they still don't have a good enough deal to recognize significant savings. As users continue to increase advertising revenue increases as well, however they are still only using about 60% of the advertising space. Initially they tested a subscription model which wasn't successful. After the free trial period no users continued to subscribe. Pandora needs to find a way to connect with users to become profitable. 

List of Plausible Alternative Courses of Action

· The alternative courses of action for Pandora are to continue to add more advertising, enter into the "freemium" option, revisit the subscription model, or they could cap the free hours charging for usage after that point . Each of these options will address the problem in slightly different ways depending on how much they want to change the current Pandora user experience. 

Evaluation of Alternatives

· The first option is continue to add advertisement. Due to the demographics, Pandora users are very attractive to major advertisers and small local companies as the same time. They can reach very targeted and segmented markets to get their message across. However, one of the benefits of listening to Pandora vs a radio station online is the lack of and subtly of advertising. 

· The second option is to create a "freemium" model. This would offer a limited, but free version to all users and an upgraded version for a price. Other internet companies have seen a great success with this model such as Hulu/Hulu Plus. This option allows Pandora to remain intact, but creates levels of users. The issue here is how limited does the limited version become? You don't want to open the door for other competitors to come in and poach your users due to lack of flexibility. 

· The third option is to use a subscription model. Pandora could charge all users a nominal monthly fee for streaming. Charging a minimal $3 a month alone would significantly increase profit for Pandora. The negative here is that you would lose some users who wouldn't be willing to pay a monthly fee. 

· The fourth option and final option is to cap the hours and charge for usage over the set hour limit. For example a user would get 40 hours free and then charged 99 cents per hour after that. This option helps control the issue of the "leaky faucet" where users just leave Pandora on even when they aren't listening and you allow for the super users to pay for the extra music they are consuming. However, similar to the issue they faced at launch as a subscription product people may just stop listening once they reach the cap. 

Recommendation

Of these alternatives the option that makes the most sense is the "freemium" option. As I mentioned earlier other sites have had great success with this option. It guarantees a profit to point while maintaining a large user base which will satisfy advertisers as well. This keeps the Pandora model as close as possible to what has been successful thus far, but opens the door for revenue by appealing to super users and techies who like have the extra access to a site.