What the Consumer Adoption Curve Tells Us About Where Pandora is Heading

The following post is an excerpt from my forthcoming book: Meltdown (which you can read more about here).  You can also read another excerpt from the book here.

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With any new technology there is a long flash-to-bang, a gap between its arrival and its transformative impact on consumer behaviour. For all that technologists may recognize the immediate paradigm-shifting potential of a new technology, consumers typically take years to understand and employ the benefits of it. This is because consumers adopt technology in phases, with distinct consumer groups adopting at different stages:

• Early Adopters: These first consumers are the most adventurous and technology savvy. Early Adopters are typically younger though not necessarily young, often male, and always wanting to be at the forefront of technology.  These consumers will willingly tolerate bugs and glitches as part of the price to pay for being ahead of the curve.  Though incredibly important, the Early Adopters are only a small share of the total population, typically in the 5% to 10% range, and as a consequence any product that appeals solely to this group will remain confined to niche reach.
• Early Followers: The Early Followers are in many ways the sternest test of whether a product or service is every going to break through to the mainstream.  These consumers are technology enthusiasts but less willing to endure bugs and glitches, instead they want technology that is exciting and new but that is also ready for prime time.  They typically take their lead from the influential voices of Early Adopters, waiting for their affirmation of a technology before adopting it themselves. Slightly more populous than Early Adopters, strong adoption by these consumers will push a product towards 20% to 25% adoption, up to, and perhaps even through, the Critical Mass Threshold.  This is the point at which a technology will either push through to the mass market or instead remain tied to the domain of the technology enthusiasts.  To date most digital music products have failed to break out of the Critical Mass Threshold, YouTube and Pandora are notable exceptions.
• Mainstream: Should a technology have truly mainstream appeal, in terms of functionality, ease of use and pricing, then the Early Followers will help drive it to the Mainstream. This is the summit of the ambition of most technologies.  This is currently where YouTube and smartphones are.  The penetration rate is typically up to about 60-65% of the total population.
• Late Adoptions: A few technologies will push even further to the Late Adopters and thus onto market saturation.  In pure percentage of population penetration terms this peaks at around 80%.  Current technologies in this bracket are mobile phones, email and Facebook.

As a technology goes through these stages the line of adoption almost always adheres to an S-Curve, with a long slow initial burn and then a sharp acceleration of growth before finally slowing down again and then finally flattening out.

This framework is useful for both understanding the historical context of music technology but also to help gauge where current technologies are heading.  When we look at the long term historical trend for Pandora’s active users we see a strong correlation with the model (see figure).  To be clear we are not talking about the total penetration rates of the entire population, but instead in the context of Pandora the model illustrates its growth within the confines of its addressable audience.

A lot of talk was made of the impact of Apple’s iTunes Radio on Pandora’s active user count, and a small dip is clearly discernable.  However when it is considered within the context of the historical growth curve we can see that Pandora’s user growth had already matured.  Though it is worth noting that listening hours among those users actually grew in October 2013 even though users dipped.

As things stand, it appears that Pandora has reached a growth ceiling.  This does not mean that it cannot accelerate beyond this but the trend indicates that something significant will need to change to make that happen.  In a longer term perspective Pandora can absolutely push further into the mainstream populous, but that growth is likely to be slower, driven by more fundamental organic trends such as overall consumer usage of digital media and the broader transition of radio consumption to digital platforms.