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Q1: Compare Pandora’s original business model with
its current business model. What’s the different between “free”
and “freemium” revenue models?
In
the beginning Pandora tried to get music subscribers by giving people
10 free hours, then asking them to pay $36 a month after that for the
service. Of course no-one was willing to pay so much for a service
that they could get for free by switching on an FM radio (Laudon and
Traver 103).
After
that model failed they tried several other options until they decided
to use the “freemium” model they are using today. With a
freemium service the basic service is available for everyone for
free, but with strict limitations in bandwidth and ads between songs
which results in a lower quality listening experience (Laudon et al.
103).
The
premium service is priced at just $36 a year, 1/12 of their previous
asking price. Three dollars a month is much more easy for a consumer
to justify. The premium service offers higher bandwidth songs and no
advertising (Laudon et al. 104).
Q2:
What is the customer value proposition that Pandora offers?
Investopedia.com
defines a value proposition as “A business or marketing statement
that summarizes why a consumer should buy a product or use a service.
This statement should convince a potential consumer that one
particular product or service will add more value or better solve a
problem than other similar offerings.” (Investopedia.com) So I
went to the About page on Pandora to find the value proposition.
What
Pandora does for its customers is provide access to music through the
“Music Genome Project.” This project was started by the founders
of Pandora and offers a way to classify music so that similar music
by different artists will group together into what they call a
personalized radio station (“About”).
The
music is evaluated by professional musicians for genre, and then
within each genre 200-500 different data points are set for each
song by the music professional. A function is used to identify the
distance between songs so that similar songs can be included in a
customer's playlist. A user can apply additional weights to
promote or demote certain bands so they will play more or less often
on their radio station. This really is impressive technology that
would be almost impossible to replicate by another company (“Music
Genome Project”).
Q3: Why did MailChimp ultimately succeed with a
freemium model but Ning did not?
The
case study claims that freemium works best when there is a very large
audience for your service and you can offer paid upgrades to make it
worthwhile for people to pay to get the additional added value
(Laudon et al. 104).
MailChimp
works as a free service because anyone that sends the same email to
multiple people is a prospective client. The light user might be
someone sending out a church newsletter as an email every week, with
a volume of just dozens of emails. A high end user could be a
corporations using the service to send a hundred thousand emails to
its customers and needing to track the conversion rate of the emails,
or now many of the people clicked a link in the email, and how many
actually purchased something because of the email (Laudon et al.
104).
Ning
didn't work as a freemium service because not everyone needs to start
their own targeted social networking site. If you need something
like that then you are willing to pay for the services up front in
order to get the features you need to grow your site (Laudon et al.
105).
Q4: What’s the most important consideration when
considering a freemium revenue model?
This is really the most important part of the case study
and the section where I learned the most about what makes a business
model a possible freemium candidate.
Large potential
audience.
This
is the most important thing. In order to grow as a business you need
to attract many people, millions of people, to your service. These
free users are the pool of people you will be converting to paying
customers (Laudon et al. 105).
Low variable cost
to add additional free users.
One
of the amazing things about the Internet is that you can provide
service to people at a cost approaching zero dollars. You can do
this with automation and by pacing the computing power you are using
to spread it across all the free users. If you have to buy a music
license or a new computer for each user you add, then you are not
going to stay in business for long (Laudon et al. 105).
Easy to use.
Let's
say you do attract people to your web site by the millions, in order
to get people to use your service, it has to be easy to use. You
can't afford to have each new customer call customer support in order
to use your service. The service must work “out of the box” for
each new user and walk them through every step automatically. This
is one of the things that Google plus did wrong. At first the
service was very simple and easy to use, but it rapidly grew in
complexity until now I can't even see my own lists of posts anymore
and have no clue what 90% of the selections even are anymore (Laudon
et al. 105).
Network effect
helps to add and keep users.
If
you can get your service spread by word of mouth, so that one person
gets all their friends to sign up too, and then it is very difficult
to leave a site because all your friends and business associates are
there, then that is the network effect in operation. This is
something that social media sites like Facebook really key into
(Cornell.edu “... in Terms of
Network Effects”).
High customer
retention rates.
It
doesn't help you if you get a million people to try your free service
and then never visit your site again. You want to make your site
“sticky” so that when someone visits the site it is so easy to
use and offers so much convenience that users keep coming back, keep
using the service, and enthusiastically tell all their friends about
your site (Laudon et al. 105).
Value of service
to customer grows over time.
Once
people are on your site and using your service, you want the value of
what you are doing for them to increase over time, so that the longer
someone is on your site, the more difficult it is to leave and the
more likely they are to use your site for their primary portal to the
Internet (Laudon et al. 105).
Q5: Pandora’s stock (P) has dropped 27% since its
initial public offering (IPO) in 2011. What recommendations do you
have for the Pandora management?
I
hate to have to say this, but I do not believe that playing music
over the Internet is a viable long term business that can sustain
itself. The license costs and bandwidth costs are just too high
when you reach a billion freemium users (Pandora Media 15).
I
think that what they need to do is to position themselves as the
alternative to the apple store on android devices. By becoming a
music store that only provides brief snippets of music they will
eliminate both the license fees and most of the bandwidth costs.
They
can also license their music classifying database through a web
interface to other companies that have a need to provide music
recommendations to their customers.
The
patent they hold is a very interesting general method of using
experts to classify items and then using automation to see what is
most like that item. This could be used for many other categories.
Either by licensing the technology to other people, or doing the tech
in house and providing web service access to the information (Glaser,
“Consumer Item Matching...”).
Q6: Would you recommend Pandora’s stock to future
potential investors? Why or why not?
Pandora
is paying more and more for it's music licensing as it adds
additional free users. At some point in the future these variable
costs will rise above the amount of money the company makes from
advertising and subscription fees and the company will have to
convert as much of its existing user base to the premium service as
it is able to do so. Its ability to convert existing users to the
premium only service will determine the company's ultimate success or
failure (Pandora Media 6).
Additionally
Pandora has never had a year where it has made a profit, and it has
accumulated a lot of debt from losing money every year of operation.
It would take years of profitability before it could do more than
just pay off its backlog of debt (Pandora Media 15).
There
has never been a business like what Pandora is attempting to do on
the Internet. The business model is unproven. A traditional radio
station has decades of experience that investors could relate to in
order to evaluate how well the company is doing (Pandora Media 6).
So
based on these three key facts, I would not recommend purchasing
stock in Pandora.
Works Cited.
Cornell.edu. Freemium Services in Terms of Network Effects. 11
Feb 2013. Web. 16 Nov. 2011.
<http://blogs.cornell.edu/info2040/2011/11/16/freemium-services-in-terms-of-network-effects/>.
Glaser, William T. Consumer item matching method and system.
Google Patents. 10 Feb. 2013. Web. 21 Feb. 2006.
<http://www.google.com/patents?id=LI54AAAAEBAJ&dq=7,003,515>.
Investopedia.com 10 Feb. 2013. Web.
<http://www.investopedia.com/terms/v/valueproposition.asp>.
Laudon et al. Kenneth C., and Traver, Carol, Guercio. E-commerce
2012. Pearson Prentice Hall. 2012.
Pandora Media, Inc. Security and Exchange Commission. Prospectus.
2011.
Pandora.com. About. 10 Feb. 2013. Web.
<http://www.pandora.com/about>.
Pandora.com. Music Genome Project. 10 Feb. 2013. Web.
<http://www.pandora.com/about/mgp>.
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interview about the startup and evolution of Pandora:
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