Pandora's New Subscription Service is Unique, But Also Very Late to the Party

 | Mar 13, 2017 | 7:27 PM EDT
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Inertia is a powerful and underappreciated force in the consumer tech world. Quite often, consumers remain loyal to an inferior product or service for years simply because they've grown quite accustomed to it, and don't want to go through the trouble of setting up or familiarizing themselves with a superior, rival offering. Just ask the millions of AOL e-mail users still out there (including, apparently, Vice President Mike Pence), or the many people who still use various Yahoo!  (YHOO)  services even as their quality keeps declining relative to alternatives.

To a degree, inertia has been a positive for Pandora (P) , helping the company maintain a giant user base for its free, ad-supported, web radio services even as many reasonably-priced, ad-free, subscription music services arrived on the scene. But there's a good chance it will be a negative in the coming months, as Pandora tries to counter the inevitable fraying of its free user base with a subscription offering that wades into a well-saturated market.

Pandora Premium, launched 16 months after Pandora bought the assets of music service Rdio for $75 million, has in some respects much in common with rival services the likes of Apple (AAPL) , Spotify and Tidal. It costs $10 per month, provides tens of millions of songs for streaming or download and offers personalized music recommendations. Where it stands out is in the way it has been optimized for existing users of Pandora's web radio services.

Users immediately get recommendations based on their web radio listening activity, and every song they've ever given a "thumbs up" to while listening is automatically put into a playlist. Pandora also provides access to its traditional personalized radio stations (ad-free, naturally), and has baked in an intelligent search engine promised to spare users the trouble of "wading through covers, karaoke versions or tribute tracks to get to your favorite tune."

In addition, Pandora leveraged its Music Genome Project -- it breaks songs down into more than 450 attributes, and underpins the algorithms used by its web radio service -- to quickly create playlists based on one or two songs. Pandora execs discussing the feature with The Verge note songs are also ordered to flow well (at least in theory), and that it automatically changes its recommendations when a user removes songs from a playlist.

But Premium still has some holes in it: While the service launches with iOS/Android apps and support for various automotive platforms, there's no PC or iPad support for now. Pandora promises PCs and "popular connected devices" will be supported "in the coming months." And there are no pre-made, human-curated playlists such as the ones found for many rival services.

More importantly, though, Premium launches at a time when Spotify and Apple Music have respectively claimed over 50 million and 20 million paid subs, including many Pandora users. Those subscribers have often put much time and effort into creating playlists, building personalized radio stations and downloading songs, and will be averse to repeating much of this work to adopt a rival service carrying the same price.

Spotify and Apple have also invested in creating decent music discovery and recommendation tools, which get smarter the more a user relies on their music services. And each has been dabbling in original content.

There are other notable rivals, of course, each of which is trying to differentiate in a unique way. Tidal emphasizes its album exclusives and support for hi-fidelity audio. Alphabet/Google's (GOOGL) YouTube Red pairs a music service with ad-free YouTube and original video content. And Amazon's (AMZN)  Music Unlimited charges Prime subscribers just $7.99 per month or $79 per year ($6.58 per month).

Given all of this, one has to wonder if Pandora Premium, for all its good points, would be in far better competitive shape if it had launched two years ago, when Spotify had less than 20 million paid subs and Apple Music was only about to launch. Pandora should still see some uptake for its service as the company promotes it to its 81 million active listeners -- those subscribing to the $5 per month Pandora Plus ad-free radio service get Premium free for 6 months -- but joining the market's big leagues (current population: 2) is going to be a tall order.

And with Liberty Media  (LMCA) apparently no longer interested in making a buyout offer for the time being, the clock is ticking. Pandora's radio active listeners and listener hours were roughly flat on an annual basis in the fourth quarter, and will likely start seeing meaningful declines this year. On average, analysts expect the company to post a loss of $0.43 per share this year, thanks partly to the costs related to launching and supporting Premium.

Pandora's loss is expected to narrow to just $0.03 per share in 2018, but that's because analysts assume Premium will help Pandora's revenue rise 27% next year (following a 17% increase this year), in spite of declining radio service usage. Given the challenges Premium faces, that could be a tall order.

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