Oakland, Calif.-based digital music service Pandora thinks it has found an offer that music fans can’t refuse: streaming music for half the price. Pandora Plus, launched last week as a $4.99-per-month premium tier, is similar to Pandora’s existing free, personalized radio offering, but paying subscribers won’t hear ads and will gain offline listening, instant song replays, and an increased number of skippable songs.

“This is a new day for us,” says Pandora chief product officer Chris Phillips.

Pandora’s new paid plan is hitting a nerve in the music industry, where some are starting to wonder whether the $9.99-a-month premium tier offered by pretty much every other existing service really is the right instrument to make up for years of declining physical and digital sales.

Some consumers used to buy only two or three CDs per year; others grew up with free music on YouTube and file-sharing services. So why would they now suddenly pay $120 annually for streaming?

“There is a clear market need for mid-tier subscriptions,” argues music industry analyst Mark Mulligan from Midia Research.

Felipe Vargas for Variety

Flexible pricing is looking like the go-to strategy for streaming music services aiming to challenge Spotify and Apple Music, the leaders in the category. Amazon is reportedly pushing the major labels for concessions as it looks to launch its own discounted music streaming service.

It’s unlikely that the labels will agree to such concessions — especially since, on the surface, streaming music seems to be doing just fine with existing pricing models. Just last week, Spotify announced that it had surpassed 40 million paying subscribers. And earlier this month, Apple Music touted that it had grown to 17 million paying subs a little more than a year after its launch.

If recent entrants to the market can’t compete on price, their options look bleak. Take Tidal: The Jay Z-owned streaming service, part of Swedish company Aspiros, had some momentum earlier this year with a series of high-profile exclusives from Kanye West and Rihanna. But last week, Norwegian newspaper Dagens Næringsliv reported that Tidal posted a loss of more than $28 million in 2015 and is behind on more than 100 of its bills, with some being overdue since 2014.

On Sept. 15, Apple threw cold water over rumors that it was kicking the tires at Tidal, with Apple Music boss Jimmy Iovine telling BuzzFeed: “We’re really running our own race. We’re not looking to acquire any streaming services.”

“Apple is playing a waiting game. I think they’ll wait until the price is right.”
Analyst Mark Mulligan on Apple’s prospects of buying Tidal

This comes after Samsung categorically denied similar rumors earlier this year.

Some believe that despite its recent comments, Apple may eventually end up buying Tidal. Having high-profile artists attached to Apple Music could be worth the expense, and Apple can afford to be patient until Tidal has no other choice but to sell for cheap.

“Apple is playing a waiting game,” says Mulligan. “I think they’ll wait until the price is right.”

Apple’s current cold shoulder toward Tidal is bad news for a number of competitors, including Deezer, which has enjoyed some success in France and launched in the U.S. this summer; SoundCloud, which launched its paid tier in March; and Napster, which was known as Rhapsody in the U.S. until a rebrand in June.

These services combined have fewer paying users than Apple Music. Worse, on their own, these smaller companies lack the deep pockets to compete with the big guys — especially with other well-financed players lurking in the shadows.

Amazon is said to be eyeing a separate paid plan with a catalog that’s as big as Spotify’s, but cheaper if consumers use Amazon’s Echo speakers for playback. The e-commerce giant currently offers streaming of a limited catalog of albums as a benefit to Prime subscribers.

In addition to Amazon, there’s Google, which combined music subscriptions with its ad-free YouTube service last year but has yet to put major marketing muscle behind the effort.

Samsung was first to face reality this summer, shutting down its Milk Music service. “We have made the strategic decision to invest in a partner model,” a company spokesperson told Variety at the time. Translation: Competing with the big dogs simply isn’t worth it.

Clearly, Pandora isn’t among those willing to cede the sector to the market leaders.

Along with its half-price service, it’s planning to launch a full-blown Spotify competitor that allows users to listen to full albums on demand. That plan, which is also expected to sell for $9.99 per month, should launch before the end of the year.

Paying Users
40m Spotify
17m Apple Music
6m Deezer
4.2m Tidal
4m Pandora
3.5m Napster

Pandora signed necessary deals for the plan with all three major labels and a top indie-label distributor last week. Now, it just needs to refine the experience, says Phillips. “That’s obviously a larger project for us.”

Pandora has actually had a $5 plan for years, albeit with fewer features than the new Pandora Plus, and little to no promotion. Still, 4 million people subscribed.

Now, Pandora wants to crank up in-house advertising and upsell to a bigger chunk of its monthly active user base of more than 80 million.

“We have the luxury of having a very large user base,” says Pandora VP of product Chris Becherer.

It’s worth noting that Pandora’s own expectations for its paid services are quite conservative. By 2020, the company expects to have 10 million paying subscribers across both its newly launched $4.99 plan and its coming $9.99 plan. This means it needs to add 2 million paying subs every year for the next three years — a drop in the bucket compared with the subscriber figures for Apple Music and Spotify.

Earlier this year, speculation arose that Pandora may itself be getting ready to sell. Executives have denied those rumors, saying they want to focus on building a sustainable business with multiple revenue streams — with subscriptions being only one movement in the symphony.

“It is a diversification of our business, not a wholesale shift,” says Pandora CEO Tim Westergren.

Mulligan is bullish on Pandora’s chances to innovate with pricing, but not so sure that the world really needs another Spotify-like service: “It is hard to see there being space for three global-scale, all-you-can-eat, $9.99 services,” he says.

Still, the analyst thinks Pandora Plus is just a first step, both for the company and for the industry as a whole.

“Pandora is constrained by what it can license from the majors,” Mulligan says. But eventually, $5 should get consumers “a lot more than just premium radio, which is what Pandora Plus is for now.”