Pandora learns the cost of ads, and of subscriptions

Media companies engage in a delicate balance between showing audiences enough ads to earn a profit without annoying them so much they leave altogether.

A new study by internet radio service Pandora shows that too many ads can motivate users to pay for an ad-free version, but push many more to listen less or abandon the service. The study found that the additional subscription revenue does not make up for the lost ad revenue from those who listen less or leave the service.

The findings are relevant as digital-media companies seek the proper balance of ad-supported and subscription-supported services. As internet users become more comfortable with paying for digital content, media companies from Netflix and Spotify to newspapers and magazines (including WIRED), are showing that subscription business models may be as attractive as free, ad-supported ones.

Mark Mahaney, senior tech analyst at RBC Capital, said a subscription model for streaming services is more attractive than an ad-supported model, but only slightly. “If you were to pick one versus the other, you’d probably pick a subscription model,” he said. “The ideal solution may well be to have both.” Having assumed the market would rapidly swing toward subscriptions, he’s been surprised by how many people are willing to tolerate ads for a free streaming product. “We have seen a shift, but it’s not been a dramatic, huge shift in preference. There’s still a very large percentage of people that prefer a free, ad-supported service.”

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