Back in February, Pandora announced a 40 hour-per-month cap on free listening. They calmly assured users that the average listener only uses 20 hours-per-month, and roughly 4% of current users will ever hit the limit.

Pandora1Pandora was hoping to fight off the cost of increasing royalty costs by luring heavy users into paid accounts. When free users start approaching the 40 hour mark, they hear ads about upgrading and receive emails that suggest adopting a paid account.

Now Pandora has reversed their decision to implement a cap and will be returning unlimited listening to users in September. That’s good; however, the response made by CFO Mike Herring to Engadget is the best part of the news. It’s a perfect lesson in presenting failure in a positive light.

In the 6 months since we first implemented the free mobile listening limitation, we have gained critical insights into our user population that has given us greater control of our business.

Herring goes on to explain that because of all these insights and research findings, Pandora was able retool a few other costs and is giving the gift of unlimited listening back to users.

Because of these insights Pandora has implemented both other surgical levers to control content cost and new features that will allow for greater product usage.

See? Implementing a six-month cap on users was a great decision. It showed exactly where the Pandora developers needed to restructure their costs. That, my friends, is how you admit that you’re wrong and backpedal on a situation.

According to TechCrunch, the listening cap caused usage to decrease by 10 percent. Removing the cap won’t bring back the entire deficit, but there will be a little increase.

Lately Pandora’s outlook has looked bleak. There have been a lot of cooks in the kitchen vying for Internet Radio market share. When it comes to finding music online, users want it all, they want it now, and they know where to get it. Pandora, Spotify, Twitter Music, and even YouTube have strong claims in the Internet radio market share.

Users have been testing new services and gravitating towards Spotify, and this “implementation of surgical levers” could be Pandora’s timely move to increase brand loyalty. Apple has promised to the launch of iTunes Radio in the near future and plans to offer free listening and zero ads for iTunes subscribers.  With competitors like that on the horizon, Pandora needs to grab all of users it can get.

We’re reaching a point in Internet history where users have the power. iTunes Radio could be the next big thing, or it could fizzle out like other failed projects. No amount of money and branding can make something cool, if that was possible then the top two social networks would be MySpace and Google+. The next six months will tell if iTunes Radio is a real threat to Pandora or if they should stick to worrying about Spotify.