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Pandora raises fees and drops annual subscriptions, citing rising music costs

Pandora raises fees and drops annual subscriptions, citing rising music costs

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Pandora's ad-free internet radio service debuted in 2009 for the very affordable price of $36 a year. Those were the good old days. Today the company announced that its monthly fees will increase from $3.99 to $4.99 and the annual option will disappear entirely due to rising licensing costs.

"The costs of delivering this service have grown considerably," the company says in a blog post. "For example, the royalty rates Pandora pays to performers via SoundExchange for subscription listening have increased 53 percent in the last five years and will increase another 9 percent in 2015." SoundExchange is a nonprofit that collects royalties on behalf of artists.

Pandora says royalty costs increased 53 percent since it started

Existing monthly subscribers will be allowed to continue paying $3.99 for now, and annual subscribers will be transitioned to the discounted $3.99 monthly rate.

The price hike is a risky move, given that data suggests customers are willing to spend an average of about $48 a year on digital music. However, Pandora is still cheaper than its competitors. Spotify and Beats Music are both $9.99 a month, while Rdio is $4.99 for web streaming, $9.99 for web and mobile streaming, and $14.99 if purchased through the Apple App Store.

Pandora has been bemoaning royalty costs for years. In 2013, 48 percent of its revenue went to pay for music. The company continues to make almost four times as much money from advertising on its free service as it does from subscribers. Pandora, a public company, made over $600 million in revenue in 2013 but its net income was negative.