“Our royalty rates have increased more than 25% over the last 3 years, including a 9% increase in 2013 versus 2012,” Pandora CEO Joe Kennedy told Mashable. “What we’re trying to do is manage those royalty costs with a minimum amount of listener disruption.”
Listening on desktop computers will continue to be unlimited, with the 40-hour restriction applying specifically to mobile devices. The change does not affect users who pay for Pandora’s subscription service Pandora One.
“We’re conscious that those royalty rates are scheduled to go up another 16% over the next couple of years. So we're trying to be very balanced,” says Kennedy. ”We want people to continue to listen to and enjoy Pandora. We hate to bring any limit to that listening, but think that this is really a balance that we need to maintain”
Kennedy says that the average user on Pandora only spends 20 hours on the service across all platforms. He says that Wednesday’s announcement is likely to only effect 4% of Pandora’s monthly active listeners.
Listeners will be notified when they reach 85% of their monthly-allotted time, so they can adjust their listening habits accordingly.
Once a user hits 40 hours, a $.99 in-app purchase will allow them to keep listening with ads on their mobile phones for the remainder of the calendar month.
Pandora did something similar in 2009, when it limited listeners on the web to 40 hours per month of listening time.
“That was in the early days, when our desktop monetization was much less mature, and it enabled us to balance the royalty cost pressure that we feel with our desire to obviously grow the service and let people listen as much as possible,“ says Kennedy.
That cap effected 10% of listeners, primarily because at the time, Pandora had a lot of heavy at-work listeners who would start listening at 9 a.m. every day, and not stop until 6 p.m. when they were headed home.
“There isn’t quite that use case here. So, it’s a smaller set of people that will be affected,” he added.
In the most recent quarter, Pandora reported $74 million in mobile revenue, up 112% year-over-year. Kennedy says Pandora's monetization rate for mobile isn't yet quite as mature as it is for those accessing Pandora from a desktop. So, while Pandora pays the same amount in royalties when a user listens via mobile as they do from a desktop, Pandora earns significantly more from desktop listeners than it does mobile.
Much like with its desktop cap, as mobile monetization matures, Pandora may reevaluate its decision to cap mobile streaming.
“We don’t know exactly what the time frame will be. We believe that monetization on mobile will eventually get into the same range as the desktop, and I think we continue to make good progress in terms of our mobile monetization efforts,” says Kennedy.
“So we do see this as not a permanent change, but, and an appropriate and necessary balancing for this stage of development given the royalty cost that we bear.”
Pandora will be contacting users it feels might reach the 40-hour cap via email in the coming days, notifying them of the change.