Pandora – great music, pretty terrible business

By | March 7, 2016

I listen to Pandora every day. On my computer, on my Roku, on my Amazon Echo, in my car, basically everywhere. It’s also a fun short-hand way to ask people what they listen to. My buddy turned me on to Carla Bruni, and it’s my “go-to” station.

Consultantsmind Pandora

Yes, the ads are annoying, but not bad enough to pay $55 a year for the subscription. Then the question enters my brain – how much money does Pandora make?

“Cutting to the chase”, Pandora loses money.

Lots of places online to look at financial statements (yes, I am sure banker-types would go to Bloomberg), but I like Google Finance. It’s clean, simple, and easy to use. Tip: don’t forget to click quarterly vs. annual numbers.

Pandora Income Statement here.  It looks like this.

  • Revenues up considerably from 2012, from $427M to $1.1B (not bad, right?)
  • Expenses up just as fast, exceeding revenues every year (uh, bad news)
  • Net loss every year (completely unsustainable)

Consultantsmind Pandora Income Statement

Pandora Cash flow here.  Where is Pandora getting their money from? How can you lose money each year and still survive? Some seriously disturbing things here. In 2013, Pandora got $377 from issue more stock. Then in 2015, they issued $301M in debt. Bad news on all fronts. Diluting equity holders by issuing more stock, and adding on more debt for a company that does not show profits.  Arrgh.

Consultantsmind Pandora Cash Flow Statement

Pandora stock performance? We know that financial performance and stock performance are not always correlated in the short-term. So maybe Pandora stock has done well in spite of poor profitability and dilution of equity?

Nope? Since June 24, 2011 (IPO date), Pandora stock is down 19%. . vs. the S&P which is up 57%. Ouch, not good at all.

Consultantsmind Pandora Stock Performance

Check out investor relations here. Since we have already gotten an x-ray view of the company’s terrible financial situation, let’s see what the Pandora Csuite say about their business prospects and why you should invest your money in this stock.

Here is the Pandora management team’s logic:

1) Lots of people listen to radio.  91% of Americans (245M) listen to radio for 18 hours a week.  Of that, 80% is AM/FM “terrestrial” radio.  Lots of room for internet radio to eat into more traditional radio.

2) Pandora has 58% of internet radio. Market share has grown since the IPO and is more than double the closest competitor, Spotify.

Consultantsmind Pandora 58% of internet radio3) Increasing the amount of usage. Pandora has done an admirable job of getting MORE PEOPLE to use the service  MORE OFTEN.

Consultantsmind Pandora Usage

4) Opportunity for more Pandora in the car.  Pandora’s argument is that most people listen to radio in their car – and therefore – need to integrate into the hardware and grab more of this drive time. To me this is a bit of an odd argument as most cars have bluetooth and can stream from your phone AND lots of people listen to real time radio because they want to listen to talk radio or sports. . . not music.

Consultantsmind Pandora 160 autos

5) Making money through advertisements. Looks like 80%+ of their money comes advertising on mobile and computer devices.

Consultantsmind Pandora Business Model

6) Big player in advertisement game. For mobile ads, looks like Pandora is one of the biggest DJ of ads – right behind Facebook, Google and Twitter.Consultantsmind Pandora Largest advertiser

7) Good customer base for advertising.  See the sample list of customers.

Consultantsmind Pandora Brands

8) Increase RPM (revenue per thousand impressions). Heard of this metric before and found this definition online for RPM from Google Ad Sense:

"Revenue per 1000 impressions (RPM) represents the estimated earnings you'd accrue for every 1000 impressions you receive. RPM doesn't represent how much you have actually earned; rather, it's calculated by dividing your estimated earnings by the number of page views, impressions, or queries you received, then multiplying by 1000. For example: If you earned an estimated $0.15 from 25 page views, then your page RPM would equal ($0.15 / 25) * 1000, or $6.00."

From this slide from their investor relations presentation, I assume that Pandora believes they can offer advertisers a higher RPM than other means.

Consultantsmind Pandora RPM

9) A list of strategic drivers? Pandora ends the presentation with a concept page – as consultants we have seen these pages too often – which is a mix of “drivers” which will help this business to grow – everything from new products to new distribution.

Consultantsmind Pandora Long term drivers

Consultant’s mind conclusion: Pandora had a huge first-mover advantage, but really did not do much with it. They are limited to 4 countries currently and being outmaneuvered by Apple and Spotify. They consistently loose money and seem to be staying afloat largely from paid-in-capital (stock issuance), and issuing more debt.

Apparently, Pandora is shopping itself around to see if there are any buyers. The stock is down 60% recently, and the market capitalization is around $2.5 billion – not cheap.

Thoughts on Pandora and who would make a good acquirer? Do you think Pandora has a future solo, or as a part of a larger media company?

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2 thoughts on “Pandora – great music, pretty terrible business

  1. JM

    I both love and hate their service.
    The music selection is much better than what I find on other venues.
    But the ads for the free service are horrendous.
    I feel like I get punished for skipping a song I don’t like.
    I tried their pay service for a year, but I believe I was still restricted to 6 “skips”/hr.
    That was a major turnoff.
    Ultimately, Pandora is an example of a service that I will exit as soon as an equivalent service becomes available.
    Absolutely no brand loyalty attached to them.

    1. consultantsmindadmin Post author

      Completely agree with all of that. . . 6 skips per hour seems silly. For me, I like how Pandora spins up new songs I did not expect show up. Like the serendipity (big GMAT word) better than pre-planning all my music (e.g., Spotify).

      Agree that they have not figured out 1) loyalty 2) a business model 3) pricing.

      Thanks for reading.

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