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Amazon and Pandora to Gauge Music’s Value in the Internet Age

How much are people willing to spend for streaming music?

For years, thanks to rigid pricing structures at streaming services, the answer has been stuck at $10 a month or nothing. But that model may soon be challenged by two giants of online media: Amazon and Pandora Media.

Both companies are set to introduce new versions of their streaming services in coming weeks, charging as little as $5 a month, according to multiple people with direct knowledge of the plans who spoke on the condition of anonymity because the process was ongoing. The plans will put pressure on incumbent players like Spotify and Apple Music and offer the music industry a major test regarding the value of streaming music — including the crucial question of whether discounts will be enough to entice people to pay anything when virtually every song is also available free.

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The pricing model of $10 a month, the standard rate charged by most on-demand streaming services, has been compared to the 99 cents that Apple charged for song downloads when it opened the iTunes music store in 2003 — a simple and comprehensible amount that established in consumers' minds the value of music in the internet age.

Pandora founder Tim Westergren.
Source: Pandora
Pandora founder Tim Westergren.

But many in the business have argued that $10 a month is too high for casual listeners. At $120 a year, it costs more than most people have historically paid for music. According to MusicWatch, a market research firm, the average music customer in the United States will pay about $67 this year on recorded music, up from $55 last year but down from $80 in 1999, around the peak of the CD market.

"Even with the presence of free, you can still get tens of millions to pay for streaming services — and possibly much more — in the event that you get the price much lower," said David Pakman, a venture capitalist and former digital music executive who has long argued that lower prices would lead to greater sales over all.

The streaming market is divided between internet radio services like Pandora, which offer songs tailored to listeners' tastes but do not let them choose exactly what songs to hear, and so-called on-demand services, like Spotify and Apple Music, which let users pick specific songs and create playlists.

Pandora is expected to make the first move by unveiling, perhaps as early as this week, an expanded version of its $5 subscription platform. That service, which is currently limited to removing ads on its internet radio streams, will soon begin offering customers new features like the ability to skip more unwanted songs and store several hours' worth of playlists online, according to three people with direct knowledge of the company's plans.

By Christmas, according to these people, Pandora wants to introduce a fully developed competitor to Spotify and Apple Music, with a catalog of tens of millions of songs that a listener can gain access to on demand. That version is expected to cost $10 a month, in line with the current market.

Amazon's ambitions may pose more of a challenge to the existing services. The company already offers a limited catalog of on-demand music to members of its Prime program, which costs $99 a year for free shipping, streaming movies and other perks. But in coming weeks, Amazon is also expected to introduce a music service with a full catalog, charging $10 a month or about half that amount for customers who use the Echo, Amazon's voice-activated speaker system, according to several people who have been briefed on the plans.

For both companies, the new streaming offerings represent variations on the existing models, with a mix of new features that are intended to entice casual listeners into paying a minimal fee without eroding the ranks of customers who are willing to pay more.

Amazon and Pandora have spent months negotiating new licensing terms with record companies and music publishers to allow their new streaming offerings, and they are close to completing those deals, according to the people briefed on the plans. Representatives of both companies declined to comment.

To some degree, these deals reflect a new willingness among the major record companies to experiment with pricing and shore up a wide field of competitors. Just last year, when Apple was negotiating with record labels over Apple Music, its streaming service, the company wanted to charge customers $8 a month. But the labels balked and held out for $10, giving Apple no price advantage over competitors like Spotify, Rhapsody and Deezer.

That episode, technology executives say, was a window into a little-understood reality of the streaming business: that prices are indirectly enforced through the licensing contracts that services sign with record companies.

Yet while the headline prices have been stuck at $10 a month, analysts and music executives say that a range of discounts and promotions has made it difficult to gauge what customers are really willing to pay. Most offer family plans, student discounts and introductory trials.

Other services have also made brief and inconclusive attempts to offer online music at lower prices. Last year Rdio, a struggling streaming outlet, introduced a $4 subscription plan that let users listen to 25 songs of their choosing each month. But by the end of the year the company had gone bankrupt, and its assets were acquired by Pandora.

Another service, Cür Media, announced its intentions this year to introduce limited streaming plans for as little as $2 a month. But by the summer, it appeared that the company had been unable to raise the $15 million that it said it needed for expenses like licensing deals with record companies. Last month, in filings with the Securities and Exchange Commission, Cür Media reported that it had laid off all of its employees, and that its chairman and chief executive had resigned. Attempts in recent days to reach any representatives of the company were unsuccessful.

Major corporate players like Amazon and Pandora do not face such basic questions of financial viability. But there are still doubts about whether lower price points will make any difference to consumers. YouTube makes virtually any song available free, and, much to the chagrin of the record companies, it is widely considered the most popular online source for music around the world. Spotify, in addition to its $10 premium service, also has a free version supported by advertising.

Russ Crupnick, the managing partner of MusicWatch, the market research company, said his research showed that subscribers to premium services like Spotify were pleased with the product and willing to pay. Furthermore, such customers were also likely to pay for other media subscriptions, like to Netflix, Showtime and so on.

But for less engaged consumers, he said, particularly those who are satisfied with radio or free streaming on YouTube, it may take much more to get them to buy a subscription.

"I don't know that you get the casual listener to automatically be a superfan just by lowering the price," Mr. Crupnick said.