1. Analyze
Pandora Using The Value Chain And Competitive Force Models. What Competitive
Forces Does The Company Have To Deal With? What Is Its Customer Value
Proposition?
Pandora highlights
specific activities in their business by using the business value chain model
where competitive strategies can best be applied and where information systems
are likely to have a strategic impact. There are many primary activities such
as personalized music which Pandora provides search on basic of song title,
artist name or genre so that it will quickly scan the entire music database and
play music of searched criteria for the customer and user experience like
Pandora is easy to use and user can skip a song in anytime everywhere. Next,
the secondary activities in the Pandora such as it is no commercials because it
provides two kinds of subscription, the one with the monthly subscription
amount has less than competitions and the one which is free with commercials,
it still has less ads than FM/Am radio. Then extension music selection Pandora
has a wider selection of songs than AM/FM radio with provides access from any
music supported device including mobile and web.
According to Porter’
competitive force model five competitive forces that shape fate of firm are
traditional competitors, new market entrants, substitute products and services,
customers and suppliers. In case of Pandora, there have many traditional
competitors like iTunes and Amazon. To compete with them, Pandora has swamped
the market with its service in different forms on every platform and offers
competitive pricing for advertisers and customer. In this regard Pandora has
established itself and has the advantage over are current rivals. Next, Pandora
is a now start up can enter into online music industry without many barriers
and difficulties so the threat of new entrants is quite substantial. Then
Pandora has to deal with the threat of substitution in the music industries
includes the traditional land based radio, satellite radios and any internet
music providers. Pandora provide the best content to its customers because
their customers can select a particular genre of music they like and they
listen to only that particular kind of closely related music at Pandora.
Suppliers in Pandora’s case, those who sell the rights to music companies like
Sony and others, Pandora must pay for its customers’ playlists as a result it
is disadvantages to have pay all the supplier’s royalties.
The value proposition is a business or
marketing statement that reviews the reason for a consumer to buy a product or
use a service. It convinces a potential consumer that a particular service or
product will add more value than their similar services. In Pandora’s case the
value of service to customer grows over time. Once people are on the site and
using Pandora’s service, they do not want to leave. Pandora does for its
customers are 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.
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.
2. Explain
how Pandora’s “freemium” model works. How does the company generate revenue?
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. As the result, 100,000 people listened
to their 10 hours music for free and then refused to pay for the annual
services. 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.
After that model failed they tried
several other options until they decided to use the “freemium” model they are
using today. The freemium revenue model works best when there is a very large
audience for free service providing revenue in terms of advertisement fees and
one can offer paid upgrades to make it worthwhile for consumers to pay to get
the additional added value. 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. It has
found most success with Pandora One, a premium service that provides higher
quality streaming music, a desktop app, fewer usage limits, and most
importantly, no advertising. Freemium revenue models offer customers a superior
service in return for paying subscription fees, whereas “free” revenue models
are typically based on advertising support.
The premium service is priced at
just $36 a year, 1/12 of their previous asking price. Three dollars a month is
much more easily for a consumer to justify. The premium service offers higher
bandwidth songs and no advertising.
Nearly 90 percent of Pandora’s total revenue comes
from advertising. Pandora generates revenue mostly by advertising. Money comes
in mostly from ads, but it's almost all given right back in royalties and
licensing. Pandora
has two ways to make money: advertising and subscriptions, with advertising
making up 90% of revenue. In the
third quarter of 2014, Pandora took in $180 million, of which $144, or 80%,
came from advertising. Mobile
has become increasingly important to Pandora's bottom line, with mobile
advertising growing 58% year over year to $104 million this past
quarter. The other $36 million of Pandora's revenue comes from
subscriptions and "other." Pandora has 3 million paying subscribers
for its Pandora One service, for which users pay $3.99 a
month. Since Pandora has been growing its top line 50% annually, it could
see revenue hit $649 million for the full year, which is its fiscal 2014. Analysts expect Pandora's revenue to grow 40% to
$909 million, giving Pandora's shares a multiple of 5x revenue.
As
of November, listener hours for Pandora were 1.49 billion, an increase of 18% from
1.27 billion during the same period last year. And Pandora's share of total
U.S. radio listening was 8.44%, an increase from 7.17% at the same time last
year. So obviously there is a lot of incentive for advertisers to put their
money onto Pandora stations.
3.
Can Pandora succeed with its “freemium” model? Why or why not? What people,
organization, and technology factors affect its success with this business
model?
Yes. Pandora can succeed because
freemium is an efficient way of a amassing a large group of potential customers
and companies. It incurs very low marginal cost, approaching zero for each free
user of its service, when a business can be supported by percentage of customer
that willing to pay. There are also other revenues like advertising fees that
can make up for shortfalls in subscriber revenues.
