To : Chief Executive Officer
From :
Date :
Subject : Improving Financial Position
Introduction
This memo recommends that Pandora look to convert its free users into paid Pandora One users to improve its financial position. As of 2013, Pandora One accounted for only eighteen percent of the company’s annual revenue. Convincing its free users to subscribe to Pandora One will benefit Pandora’s financial position.
Background
Pandora Internet Radio was formed by Tim Westergren in 2000 when he started an entitative known as the “Music Genome Project.” This project mirrored the human genome projects, and it aimed to analyze and classify music based on 450 musical features. Tim Westergren applied this concept to develop Pandora Radio, which provided radio internet services. Pandora offered a music library and personalized music recommendation service. Pandora has two primary offerings; a free radio service with multiple advertisements and an ad-free subscription service known as Pandora One. Pandora’s innovation allowed it to rapidly grow and upstage the traditional radio service in the United States. However, increased competition from other radio internet providers such as Apple Music, iTunes, Spotify, Deezer has made life difficult for Pandora. Unless Pandora changes its business strategy, the increased competition could force it out of the market.
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Analysis
Pandora’s free radio service had over 200 million registered users as of December 2013. On the other hand, its premium subscription service had only 3.3 million subscribers at the same time. This meant that Pandora One only generated 18% of the company's income, while 82% of the revenue was generated through advertisements. However, music rights licensing and acquisition costs have continued to rise, with a 36% year-on-year rise in December 2013. Furthermore, sales and marketing expenses were also very high since the company had to market itself to advertisers. These are the main issues that have resulted in Pandora struggling with profitability.
Recommendation
The main objective is to remain competitive, and the only way to do that is by increasing revenue. Pandora should strategize on converting the majority of its 200 million free radio users to pay for their streaming service Pandora One.
Basis for recommendation
Increasing the number of subscribers to its premium service would improve subscription revenue and reduce selling and advertising costs due to the conversion of the free radio users. This will improve Pandora’s profitability.
Discussion
The other strategy that Pandora can incorporate would be to grow and improve its current catalog. They should also work on improving the customers’ user experience by improving their website and mobile applications UI designs.
Next step
The managers will have to formulate some strategies to entice free users to move to the premium service. These include providing “free trials” that will allow users to experience Pandora One without cost for a while, with the hope that they like the experience and subscribe to the service.
References
Bennet, J. (2018). Strategies for Achieving Profitability in the Music Streaming Service Business Model. Walden Dissertations and Doctoral Studies Collection . Retrieved 13 July 2021, from : https://scholarworks.waldenu.edu/dissertations.
