During this afternoon’s earnings call, Pandora executives said that they would lift for the 40-hour monthly cap on free mobile listening that was announced back in February.
This is actually the second time Pandora has instituted a free cap and then lifted it again — it last lifted the cap in September 2011.
CFO Mike Herring said the decision was based on two factors. First, he described the cap as a “blunt tool” for limiting usage and costs, and in the time since, the company has developed more “surgical techniques” (such as skip limits), that control costs without affecting the listener experience as obviously. He also said that due to improvements the business, particularly in the advertising business, Pandora can now “monetize those hours from 41 onward at a much higher rate.”
Herring also noted that when the mobile cap was reinstituted, usage dropped 10 percent. He said lifting the cap won’t lead to a corresponding jump, due to the measures he hinted at earlier that are limiting usage: “We don’t expect a big spike in hours. We do expect the hours to go up.” And Herring suggested that without the cap, subscriptions won’t grow dramatically, and he predicted that they’ll make up 20 percent of the company’s revenue for the year.
One thing that Herring didn’t directly connect with the news was increased competition — an issue that’s looming large with the upcoming launch of iTunes Radio, where there hasn’t been any cap reported. However, he did touch on competition in another portion of the call, saying, “We are no strangers to intense competition.”
Those earnings, by the way, beat Wall Street estimates, with revenue up 58 percent year-over-year. The company predicts that it will be profitable for the full year.
Here’s the script for Herring’s initial remarks during the call:
Our investment in advertising infrastructure and implementing smart levers such as reducing song skipping and limiting mobile listening have helped us drive monetization and manage content costs, as reflected by the increase in RPM and a decrease in content costs as a percentage of revenue. When we introduced the 40 hour mobile listening limit, we were confident that our scale – over 7% of total radio listening and Pandora’s number one ranking in most major markets – would allow us to take this action without impacting our key monetization initiatives in driving the disruption of the radio advertising market and driving our mobile advertising leadership. As our results have shown, the continued strong growth in our advertising revenue allowed us to cover the increased royalty costs with dollars left over to invest back into the business.
With these tools in hand, and insight into how they work, we are resetting our levers in September. Notably, Pandora plans to eliminate the blanket 40-hour-per-month limit on free mobile listening effective September 1st. In the 6 months since we first implemented the free mobile listening limitation, we have gained critical insights into our user population that has given us greater control of our business. Because of these insights Pandora has implemented both other surgical levers to control content cost and new features that will allow for greater product usage. With these tools in place we are well positioned to continue to both optimize the cost structure of the business and further monetization progress.