How Much Will Pandora's Ad-Free 10th Birthday Cost? A Lot, But There's a Big Upside

Chelsea Lauren/Getty Images for PANDORA Media
Steve Aoki cakes Pandora Associate Producer Ben Farber during Pandora Summer Crush 2015 at L.A. LIVE on Aug. 15, 2015 in Los Angeles, California. 

Saying "thank you" can do wonders.

Pandora's Listener Love Day on Wednesday will mark the Internet radio service's 10-year anniversary and act as a "thank you" to its tens of millions of listeners. It will be an expensive day of celebration, costing Pandora millions of dollars, but it could end up producing far greater returns.

Foregoing ads will, obviously, mean lost revenue. Pandora's third-quarter guidance points to revenue between $310 million and $315 million. Taking that midpoint, $312.5 million, and assuming the advertising accounts for the same share of total revenue as last quarter, third quarter advertising revenue will be $252.7 million. That would mean single-day revenue is $2.7 million. This is, roughly, the amount of advertising revenue Pandora will give up on Wednesday.

There will be a direct expense of roughly $1.1 million while Pandora is foregoing revenue. Second-quarter listening hours were 5.35 billion. Assuming free and subscription listening follow the same ratio as free and subscription revenue, and assuming the average song length is 3.5 minutes, Pandora will stream about 810 million songs to free listeners on Wednesday.

It could be a small price to pay for the exposure and other benefits that could come from Wednesday's ad-free listening day. For starters, Listener Love Day has already benefited from widespread media coverage in newspapers, blogs and press wires. It's likely to garner even more attention on Wednesday. That kind of attention is helpful even for a mainstream service with about 80 million monthly listeners.

In addition, Listener Love Day could help Pandora gain more subscribers. Starting Thursday, Pandora will offer a one-day subscription, called the Pandora One Day Pass, for 99 cents. The One Day Pass could be an effective way to get otherwise free listeners to start paying for the regular Pandora One ad-free subscription plan. Or it could maintain Pandora's current subscription levels in the face of mounting competition. 

Over the last decade, Pandora has built a substantial lead in Internet radio. According to Triton Digital's July 2015 ranking of domestic music streaming services, Pandora was no. 1 with 1.17 billion session starts and 2.24 million average active sessions (from 6:00am to 8:00pm Monday through Friday), well ahead of no. 2 Spotify (703.3 million and 935,000) and even further ahead of the next Internet radio service, no. 3 iHeartMedia (161.1 million and 355,000). Spotify, a subscription-based on-demand service, has narrowed its gap with Pandora, but radio listeners maintain Pandora's lead by a wide margin. 

Another way to think about Pandora's ad-free day is from a brand perspective. Eliminating ads for an entire day is likely to augment consumers' perception of the brand. Rather than offer a discount for signing up -- something its streaming competitors frequently do -- Pandora is providing a benefit (getting rid of ads) and asking for nothing in return. And many consumers will probably realize Pandora is giving up a considerable amount of ad revenue. It's a "thank you" with no expectation of reciprocation.

Just saying "thank you" can have powerful effects. Research has shown showing gratitude increases recipients' sense of self-worth, motivates recipients to reciprocate, and spurs customers to pay more than customers that don't receive expressions of gratitude. Few streaming services can express their gratitude to listeners for helping them reach the ten-year mark. For Pandora, a "thank you" is not only be in order, it will probably be beneficial. 

Of course, Wednesday's well-advertised ad-free day could draw an influx of listeners, raising the amount of royalties due to rights holders. But a 10 percent increase in free listening would result in a royalty increase of just $113,300. That's a small sum given the potential upside in Listener Love Day.