Exclusive: Pandora Paywall Pays Off, Research Shows

The conventional wisdom of digital business models states that it's a bad idea to start asking people to pay for something they're used to getting for free.

Yet, that's exactly what Pandora did in February when it capped the amount of free streaming each listener gets a month on mobile devices to 40 hours. Those who wanted to keep the music going were asked to pay 99 cents to continue on an unlimited basis for the rest of the month, or $3.99 a month for unlimited ad-free listening.

Instead of triggering a mass riot among Pandora's 70.1 million active listeners the way Netflix did last year with its price hikes, two things happened: listener hours dropped 12% in April and, in the same month, the app hit the No. 1 top grossing app on iOS outside of games, according to a report released Thursday by AppAnnie, a San Francisco-based firm that tracks apps across multiple platforms.

Both outcomes were positive for Pandora -- the drop in listener hours helped reduce the company's licensing cost (Pandora is required to pay for every stream). And it did so without sacrificing its audience size -- active listeners actually grew from 69.5 million in March to 70.1 million in April.

The second outcome, a 114% year-over-year growth in the number of paying subscribers to 2.5 million at the end of April, helped make Pandora the No. 1 publisher on iOS by monthly revenue, excluding games. That's up from No. 3 in March. Apple, which sells apps such as Garage Band and iMovie, came in second place. The Japanese publisher of LINE, a free messaging app that sells virtual icons, rounded out the No. 3 spot on AppAnnie's monthly Index Report.

Marcos Sanchez, vice president of AppAnnie, said Pandora's achievement points to a larger trend among apps -- a movement toward micro-transactions as consumers get increasingly comfortable with paying 99 cents or so for discreet amounts of additional content or perks.

"A number of apps have successfully gone from a paid model [where consumers buy the entire app up-front] to an in-app purchasing model" where they can spring for upgrades from a free version, Sanchez said.

In Pandora's case, the company offered a 99-cent option on top of its free version and $3.99 a month subscription tier. That helped Pandora double its subscription revenue to $20.4 million in the quarter ended April 30, up from $10.2 million a year earlier.

The AppAnnie Index Report offers two other music-related insights: 

The list of top apps in the music category are relatively stable compared to other genres. "Most top music apps tend to maintain their rankings over many months," Sanchez said. "There's not a lot of movement among them, especially when you compare them to games, where there's a constant flow of new titles." Sanchez speculates it's because people seek consistency in their music experiences, whereas games involves a more active search for new apps. As a result, music is an especially tough category to break through, Sanchez said, citing Twitter #Music's current efforts to get traction as an example.

Spotify cracks Top 10 via international expansion, referral promotion. The Swedish music service came in at No. 10 in the list of top downloads for April on iOS, driven by its expansion into eight markets including Singapore, Hong Kong, Malaysia, Mexico, Estonia, Latvia, Lithuania and Iceland. Spotify also offered a promotion (refer a friend, get a month free) that helped boost subscriptions.