Why Pandora Is Limiting Listening

Last week the internet radio site announced it would be putting a cap on ad-supported mobile listening.

Tim Westergren (top center-left), founder and Chief Strategy Officer, and Joe Kennedy (top center-right), president and CEO of Pandora internet radio, on the floor of the New York Stock Exchange. Image by Ho New / Reuters

On Feb. 27, Pandora announced that it would be putting a cap on the amount of music users could stream from mobile devices. The royalty rates Pandora pays per song are too damn high, Pandora cofounder Tim Westergren said.

The limit, introduced last week, will kick in once listeners have streamed 40 hours of music in a single month on a mobile device.

“Internet radio has been stuck with its own rate-setting standard that is different and much worse than the similar rate-setting standards for other radio mediums like satellite radio and cable radio,” Westergren said. “That rate is the direct driver of this mobile cap — that rate problem.”

“We’ve been trying for years now to get Congress to fix this legislation,” Westergren said of the system that sets Pandora’s rates, originally put in place by the Digital Millennium Copyright Act.

Spotify, Pandora’s chief competitor in the music streaming business, has a different model — since the bulk of Spotify’s business is à la carte streaming, royalty rates are, for the most, part decided by agreements with the labels themselves.

(Spotify and another Pandora competitor, Rdio, also charge more for mobile service. Unlimited ad-free streaming on both costs $9.99, compared to the same service from Pandora for $3.99.)

Pandora’s most recent effort to effect a rate change was a piece of legislation the company supported called the Radio Internet Fairness Act. The bill died in Congress’ last session, but there are murmurs that a similar bill may be reintroduced this year.

The controversial legislation was supported by Pandora and Clear Channel, and opposed by groups representing artists, like the Recording Academy. (One critic of the RIFA called it “a wealth-transfer bill, taking money that’s going to artists and redirecting it to Pandora and Clear Channel.”)

In a blog post announcing the cap, Westergren wrote, “Pandora’s per-track royalty rates have increased more than 25% over the last 3 years, including 9% in 2013 alone and are scheduled to increase an additional 16% over the next two years.”

Pandora’s advertising revenue has not grown at the same pace that royalty rates have increased, Westergren explained in a phone conversation.

“Every time we stream a piece of music, we pay an incremental amount of money,” he said. “If the growth is that fast and you’re relying on advertising, sometimes you have to slow it down to catch up.”

Pandora has not been able to monetize its mobile service as quickly as it the web service, and most of Pandora’s listeners — 75%, according to the company — access the service through mobile.

The company expects fewer than 4% of those listeners to hit the new limit. Those who do hit the limit will have the option of paying 99 cents for unlimited streaming for the remainder of the month.

Pandora’s decision to institute a listening cap is not unprecedented. “We did this once before, a few years ago, on web,” Westergren said, referring to the listening limit. “It took a couple years, and then we lifted it.”

Like it was the last time around, Westergren expects the cap on listening to be temporary. It will be lifted when Pandora is able to generate enough revenue through advertising — or when Pandora is able to successfully lobby Congress to pass legislation that would lower the royalty rates it pays per song, and that might require crafting legislation that artists can get behind.

Westergren, for his part, sees Pandora’s interests and the artists interests as one and the same.

“I think you would be hard-pressed to find an artist who thinks you should turn a radio station off,” Westergren said. “And that’s effectively what is happening here in the form of a cap.”