Pandora announced an initiative Wednesday to address rising content costs relating to its listeners' mobile use. The Internet radio company will cap mobile listening hours at 40 hours per month for U.S. users.
A blog post  by Pandora founder Tim Westergren lays out the new rules and the options listeners will have: listen for free on computers, pay 99 cents for extended listening once the 40-hour cap is reached (through in-app purchases) or subscribe to Pandora One, the company's ad-free product that costs $3.99 per month. Westergren calls the cap "a very unusual thing to do" but explains Pandora's per-track royalty rates" have increased more than 25% over the last three years, including 9% in 2013 alone and are scheduled to increase an additional 16% over the next two years."
Westergren calls the cap "a very unsual thing to do" but explains Pandora's per-track royalty rates " have increased more than 25% over the last 3 years, including 9% in 2013 alone and are scheduled to increase an additional 16% over the next two years."
CEO Joe Kennedy tells Billboard the cap is likely to be temporary but could not say for sure what life span it will have. A previous cap on desktop listening  was implemented from July 2009 to September 2011. Listening was capped at 40 hours per month and users who surpassed that limit could buy unlimited hours for 99 cents. Kennedy says that first cap "proved to be a smart lever to impact royalty costs."
Only 4% of its monthly active users, which stood at 65.6 million in January, will be affected by the new rule. The average Pandora listener uses the service for 20 hours per month across all devices.
Word of the cap on unlimited mobile listening appeared to leak out Tuesday. Shares of Pandora were up 3.6% Tuesday to $12.23 and were up another 4.2% to $12.74 in mid-afternoon trading Wednesday. Investors and analysts, who are often worried about Pandora's royalty burden, are likely to be pleased by this news.
Pandora has seen its content acquisition costs rise outpace revenue as its users have shifted to mobile devices, which the company does not monetize as well as the desktop service. Content acquisition costs rose to 60.3% of revenue in the nine-month period ending October 31, 2012 compared to 52.1% in the prior-year period.