Last month Pandora launched an iPhone application that has revolutionized a corner of my world. The service is already the 4th most popular application on the phone (first in music) and it drove a record 3.3 million songs streamed in one weekend to iPhone listeners alone. Yet it has no ads. Given that Pandora’s revenue model depends on clever advertising with high CPMs, how can Pandora afford the royalties and bandwidth? One explanation is to view the launch as a massive—and massively successful—marketing expense until the user base can be monetized.
It’s not yet clear how Pandora and Apple plan to do this. Pandora claims that the iPhone Application Store does enable ads at the time of downloading, but how would this measure against the impressions and CPMs that Pandora generates online? This approach doesn’t add up. One more likely avenue is the intermittent display of ads within the application itself—taking launch screen or cover art real estate, for example. It’s inconsistent with the controlling nature of Apple to let this happen unabated, however, and it would certainly interfere with Apple’s brand management.
The most dreaded alternative is the interruption of music. Long before this happens I would expect Pandora to charge for its mobile software, or for Apple and its plumber AT&T to share data plan revenue with Pandora. After all, the software is a big win for all three, not to mention a flashy counterpoint to the new, higher priced iPhone data plan.
Meanwhile the popularity of the app continues to drive Apple customers to Pandora and vice versa. Both companies are thriving with such differentiation (note that Last.FM, a Pandora competitor, also has an iPhone app available). Through this technology and a multitude of other capabilities, the iPhone has reduced my use of a computer at home by more than 50%. My loyalty and evangelizing have also increased—finally true innovation and convergence in mobile technology!
So when does Pandora start worrying about the costs? Maybe never. If the service continues to grow and new users also migrate to the online version (while at work, for example), Pandora can likely defend its margin through one or a combination of the options above. For me, the era of purchased music is officially over.