How Pandora could turn a profit where Spotify hasn't been able to

Tim westergrenGetty / Jason MerrittPandora founder and CEO, Tim Westergren

Internet radio pioneer Pandora is readying its on-demand product, which could roll out as soon as next month, according to the Wall Street Journal.

Pandora will reportedly offer two premium tiers, at $5 and $10. The $10 offering will compete with the likes of Spotify and Apple Music to provide an expansive catalogue of tunes you can listen to whenever you want.

This is a departure from Pandora’s current business model, which doesn’t let you pick exactly what song you want to listen to, but instead creates various “stations” for you.

The significance of this shift is huge, as it means that Pandora now has to directly negotiate with music labels on royalties instead of paying a rate determined by the government.

But analysts at Bank of America Merrill Lynch, led by Nat Schindler, believe that Pandora might be able to negotiate better label deals than its competitors.

Here are the three reasons the analysts pointed to in a recent note:

  • Pandora’s “ability to drive promotion, ticket sales, and analytics.”
  • “No need for an industry-hated free service for marketing.” The free tier has been a crucial way for Spotify to snag new customers for its premium tier, but many heavyweights in the music industry have grumbled about it. Pandora won’t need that in its current markets, as it can use its existing subscriber base.
  • Pandora’s “more positive view within the music industry.”

But even if Pandora just gets the same deals as Spotify, Apple Music, or even Tidal, the analysts think it could fare better than competitors.

“Spotify releases annual filings and is paying roughly 80% of [revenue] to licensing and at $2bn in [revenue] is not profitable,” the analysts wrote. “We think [Pandora] could be profitable given similar economics due to their ability to market the service to their existing 100mn quarterly user base through no cost email advertising and house ads on their core radio style service.”

Pandora’s big challenge will be in foreign markets where it doesn’t have a presence. It will not have the ability to piggyback off its current service, and will face fierce competition from already established players like Spotify.

BAML reiterated its “neutral” rating on the stock.

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