An article in WSJ Blog Venture Capital Dispatch reveals some interesting notes about the development of Pandora, one of Internet radio’s most listened to stations. Founder Tim Westergren credits one of Pandora’s early investors, Crosslink Venture Partners, with turning their heads from the idea that they could succeed with a subscription based revenue model, and instead encouraged them to develop an ad-supported strategy.
“The best-case scenario is we would be a modest-sized subscription service,” Westergren said. “We would probably be profitable, but wouldn’t have made a major impact.”
Instead, Pandora decided to offer an ad-supported free option in addition to a $3 subscription service without ads. In the first six weeks after the company added free service they gained 450,000 registered users and just 700 new subscribers. According to the article, the company now boasts more than 30 million registered users and is on track this year for $40 million in revenue.
Having built a large listener base, Pandora has begun to experiment with more aggressive revenue strategies as well. Earlier this year they began introducing audio ads for the first time. They also have begun to charge a token fee of 99cents per month to their most active listeners (40 or more hours per month), and have introduced a premium version of Pandora that is ad-free for listeners who prefer a subscription option.
All of these moves are sensible and positive steps toward the development of a successful business model comprised of several compatible revenue streams. From the rear view mirror, it looks like an excellent strategy – build an audience, gain their trust, introduce moderate amounts of ads and fees. In Pandora’s case, listeners have remained loyal and tolerant of the changes.