Pandora made it through one listening cap and it is likely going to make it through its second one. Founder Tim Westergren, who happened to be in Washington, D.C., a day earlier speaking out against the royalty system that resulted the listening cap, announced the new rules Wednesday in a blog post and an email to listeners most likely to be affected.
Investors didn't take the news as well as listeners. Shares of Pandora were down 1.9% to $12.50 in after-hours trading. Hopefully Pandora will give feedback next week. Expect Wednesday's announcement to be a major topic of conversation during Pandora's earnings call on March 7.
The blog post had received many dozens of replies within the next three-and-a-half hours. Most were positive. Many were complementary. Some were negative. I didn't notice anybody acknowledge the similar listening cap Pandora implemented from July 2009 to September 2011.
Perhaps no other digital music service has such a close relationship with its listeners as Pandora. Scroll through the blog post's comments and you'll easily get a sense of how people reacted to Westergren's announcement.
-- The number of people who say they would pay after reaching the 40-hour cap seemed to far outweigh the number of people who scoff at the notion of paying for radio. There will probably be a difference between purchase intention and actual purchase, but on Wednesday some of Pandora's heaviest listeners seemed intent to pay to listen beyond 40 hours. They can opt to pay a 99-cent in-app purchase when the 40-hour limit is reached or subscribe to the ad-free Pandora One service for $3.99 per month.
-- If the comments are to be believed, Pandora's competitors will get at least a few new listeners this week. In the comments section, some people told Westergren they would leave for such services as Last.fm and Slacker. The timing couldn't be better for Slacker, which recently launched an ad campaign targeted at Pandora. Let's see how creative Slacker can be in using Pandora's 40-hour cap to woo new listeners.
-- Some heavy users aren't even paying attention while they accrue royalty obligations. Westergren received a few suggestions for a sleep timer that would stop the service after a certain period of time -- and save the company royalties.
-- I can't imagine another Internet radio service getting so many replies, or so many that address the founder by his name. Read through these comments and you'll get a good sense of the personal relationship people have with Pandora that they don't have with other digital music services, perhaps with the exception of iTunes. Equity analysts are correct to say the barriers to entry in Internet radio have fallen over time, but I think some of them underestimate Pandora's brand equity. Low barriers to entry can erode a company's value, but brand equity can protect it.