If they place a cap on their service, it will only be for mobile listeners. Pandora claims to make roughly $60-70 per 1000 listening hours via the desktop versus only $20 per 1000 hours via a mobile. The revenue for a desktop listener far exceeds the cost of royalties while the revenue from a mobile will barely break even and in most cases will not meet the cost of the royalties. It depends on the length of the songs, amount of skips, length of commercials, etc. It is pretty safe to say that roughly 3 cents per hour or $30 per 1000 hours is the high end for royalties, but they will most likely be around $20 per 1000 hours if my own math is accurate. I have not seen a definite average cost given by Pandora. Heavy listeners that use a desktop computer are actually more preferable on the ad supported service than Pandora One. Pandora One is $36 per year, regardless of how many listening hours are logged, while paying a higher royalty rate than that of the free service. Subscription tiers are not covered under the lower royalty Pureplay licensing deal. So something investors do not seem to realize is that Pandora One can lose substantial money if the listeners are heavy listeners, such as people who listen 8 hours a day at work. A subscription route will not be ideal unless they charge more for it, which would lower the competitive advantage versus Slacker, Spotify, and similar services.
Considering the bulk of Pandora's listening is on mobile devices, they will have to raise the revenue per 1000 hours of mobile listening if they hope to be profitable. That will be difficult to do. Partially because video ads that pay more simply eat too much bandwidth. Listeners will not tolerate them in any large number. Visual ads that require user interaction also pay more, but will also not be accepted on wide scale because of the hassle and danger of dealing with them while driving. Slacker is trying this right now and has had backlash for this very thing. If these services want to break into the car, they need to be driver friendly. So the only ads that work effectively are audio and quick pop-up. Both of which pay less.
While a lower royalty rate is needed, they may not ever get it. Either way I think Pandora will need a more advanced advertising system. If they can target a listener by the activity they are performing, they might be able to turn things around. For example, a jogger listening to Pandora would most likely tolerate ads that require user intervention if it meant less audio ads. While a person driving would likely prefer audio ads than ads requiring interaction. A person sitting at a desk on wifi or on an unlimited data plan would probably prefer video ads if it meant less overall interruptions. They could target people in their car on the way in to work with Starbucks ads and on the way home from work with Subway ads. If Pandora could pull this off and use higher paying ads where applicable, along with more personalized targeting of ads allowing them to charge more, they could probably raise their revenue substantially. The technology for this kind of advertising is available and they do a little bit of it now. Whether or not Pandora could ever make full use of it is another story.
