Pandora's New Plan to Convert Freeloaders

Pandora To Raise $231 Million With Sale Of 10 Million Shares
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There aren't enough people paying to stream Pandora these days, but the company behind the leading music discovery app has a plan. It revealed during last week's Investor Day that it's getting ready to introduce a one-day pass whereby music fans can pay 99 cents for a day or so of access to ad-free tunes.

Pandora Media (P) already has a premium offering. Folks can pay $4.99 a month for Pandora One, a platform that serves up the same content but without ads, at a higher audio quality and with more daily skips available. Pandora also teamed up with Mood Media, offering its streams to businesses for $24.95 a month as a fully licensed service for commercial use.

However, Pandora's still widely consumed on a free ad-supported basis by most of its 81.5 million active listeners. They're freeloaders, putting up with commercials and a limited number of songs that they can skip on the leading music streaming service that serves up custom-tailored playlists based on listener preferences. Less than 5 percent of Pandora's user base is paying for the service, going by the mere $16 million a month it was collecting in subscription revenue in its latest quarter.

Training Wheels of Monetization

Why would someone pay a buck for a day of streaming music free of marketing breaks? Pandora suggests that someone hosting a party may want to provide a seamless audio experience. Paying a buck so your guests don't think you're a cheapskate sounds like a fair trade, and it's not a surprise that a lot of people turn to Pandora when it's time to entertain.

Single-day usage hit an all-time high on Christmas Eve, with more than 30 million of Pandora's users streaming away. We know that most of them decided to enjoy the app with the sponsored missives instead of paying up for a Pandora One subscription, but a single one-day pass for just 99 cents offers the tantalizing combination of a low price without having to cancel Pandora One before the month is up.

It's a smart move, and it gets even smarter when one considers that Pandora will be wooing its tunes-happy freeloaders to set up their payment accounts. This one-day pass could be a gateway drug to full-blown Pandora One subscriptions if users warm up to the prospects of checking out more music without the ad breaks.

Pump Up the Volume

Pandora can use the help. The stock hit another 52-week low this week. The shares have surrendered more than half of their value over the past year.

%VIRTUAL-WSSCourseInline-538%Growth has decelerated. Its user base expanded by just 7 percent over the past year. The average user is listening more often. Listener hours climbed 15 percent to 5.2 billion during the fourth quarter compared to the prior year's holiday period. Advertising revenue is growing even faster than that as Pandora has been successful in getting sponsors to pay more to reach its audience. However, Pandora's fourth-quarter financials fell $7.5 million short of the midpoint of its guidance because of weaker-than-expected holiday advertiser spending.

There's nothing wrong with advertising as a key model driver -- and it accounts for nearly 80 percent of Pandora's revenue -- but it can be volatile. Battered investors wouldn't mind heartier growth in the more steady subscription revenue, and if these one-day passes get folks used to treating Pandora as a premium service, it wouldn't be a surprise if the slumping stock begins to sing a merrier tune.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Pandora Media. Try any of our Foolish newsletter services free for 30 days. Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.