Pandora Media Inc. (NYSE: P), the popular online music streaming app, recently announced that it would cap free mobile listening at 40 hours per month due to rising royalty costs.
The Oakland, Calif.-based company, which figures out what music you'll like based on the music you already do like, relies mainly on advertising as its core revenue stream and is reportedly struggling as a result of growing competition from the likes of Spotify and Sirius XM Radio Inc. (NYSE: SIRI).
While Pandora Radio claims 150 million registered users, track royalty rates have increased more than 25 percent over the last three years, including 9 percent in 2013 alone and are set to increase an additional 16 percent over the next two years, co-founder Tim Westergren wrote in a blog posted on the company's website.
"After a close look at our overall listening, a 40-hour-per-month mobile listening limit allows us to manage these escalating costs with minimal listener disruption," he said.
Pandora is currently lobbying lawmakers in U.S. Congress to pass the Internet Radio Fairness Act, which would change regulations on how royalties are paid to artists. Users of the online streaming service can even get in on the legal fun by signing a petition, according to a commercial that one can hear while listening to music via the application.
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The commercial suggests that online streaming music companies like Pandora pay a different rate to license music than traditional radio companies.
According to Westergren’s blog post, the cap will affect less than 4 percent of its total monthly active listeners as an average listener uses only about 20 hours listening to Pandora.
Listeners who reach the 40-hour limit can pay 99 cents for unlimited listening for the remainder of the month, or subscribe to Pandora One for unlimited listening and no advertising, he wrote.
In October 2012, Rolling Stone gave Pandora an 85 percent chance of survival, saying the user base is loyal enough to overcome the company's inherent financial problem.
"The streaming business is obviously growing and booming. It's north of a billion-dollar business now," Alex Luke, executive vice president of A&R for the Capitol Label Group, whose artists include the Beatles, Katy Perry and Coldplay, told RS in a previous interview. "But it's still in its infancy."