Why Pandora Will Never Be Great Again

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PandoraInternet radio has never been as popular as it is right now.

Between the booming popularity of smartphone apps and cars that allow smartphone owners to stream Web-served radio through Bluetooth wireless connections, terrestrial radio and perhaps even satellite radio have good reasons to fear their future.

Market leader Pandora (P) continues to grow at a heady pace. It has seen its shares of the total U.S. radio-listening market nearly double to 5.55% -- and that's just one company.

Spotify has been a hit since rolling out stateside this past summer, and even traditional radio giant Clear Channel recently beefed up its iHeartRadio streaming app to include a Pandora-like music-discovery service.

This is all true, but it didn't stop shares of Pandora from take a beating on Wednesday.

Cracking Open Pandora's box

Pandora's stock took a hit after posting disappointing quarterly results and offering up uninspiring guidance for the year ahead.

The numbers may seem impressive at first glance. Revenue soared 71% to $81.3 million. After back-to-back quarters of profitability, analysts were braced for a small deficit, so an adjusted loss of $0.03 a share doesn't seem so bad.
Unfortunately, Wall Street was banking on a loss of just $0.02 a share on $83.1 million in revenue.

Things get uglier when we begin to look ahead. Pandora expects revenue to decline sequentially to between $72 million and $75 million, posting a much larger loss than the pros were forecasting. Pandora's also targeting a substantial deficit for the entire fiscal year, nipping analyst calls for a full year of profitability.

Everywhere you turn, Pandora's singing off key.

The Spirit of Internet Radio

Pandora was birthed a dozen years ago on the technological notion that a song's DNA could be dissected in the same way that humans' genes can. The Music Genome Project broke down a large and growing catalog of music, and Pandora Radio was able to serve great music recommendations based on songs' similarity to ones you've already said you liked.

The service was an immediate hit for PC users, but the allure of technologically customized play lists really took off when smartphones allowed music buffs to take the service on the go and in their cars. Nearly two dozen auto manufacturers now have deals in place with Pandora so smartphone owners can stream the service directly through their car speakers.

Pandora's 47 million active users streamed 2.7 billion hours this past quarter -- 99% more music than they were listening to a year earlier. That's impressive, but then you remember that revenue only grew at a 71% clip. Why isn't revenue growing as quickly as usage? Isn't this a scalable model? Shouldn't advertisers be drawn to the platform?

The Numbers Don't 'Ad' Up

It's not easy making a profit on audio advertising. Even Sirius XM Radio (SIRI) -- seemingly a dream target audience for sponsors -- has had periods where ad revenue per user actually declines. The saving grace for Sirius is that satellite radio can lean heavily on its juicy subscriber premiums. Pandora has more than a few fans willing to pay money to skip the ads, but most of them are ad-tolerant freeloaders.

It's hard to turn a profit if you're an ad-based online music service. The record labels command a chunky slice of the revenue in the form of music licensing royalties, and advertisers fear that their ads won't get through to consumers.

Sure, with so many Pandora users streaming on their smartphones, advertisers know that they're reaching people with disposable income. Unfortunately, radio ads aren't as actionable and accountable as traditional online advertising. It's not as if someone streaming on a treadmill or commuting on a train is going to take the time to act on a marketing pitch. Few users are actually looking at their screens, so it's not as if the advertisers can count on click-through traffic to generate leads.

The obvious solution is for Pandora to smoke out more premium subscribers, but that's just not happening. Subscription revenue -- which only accounts for 11% of its income -- is actually growing slower than the disappointing ad revenue.

And now that more wireless carriers are starting to cap data usage, how many people will be willing to pay a premium on top of their already costly data plans? Pandora needs to wean most of its 47 million active users off the ad-based model, but they're about to get spooked into streaming less.

Pandora continues to trade below last year's $16 IPO price, and Tuesday night's report isn't going to help the dot-com speedster get over that hump. Internet radio is here to stay, but Pandora made the mistake of teasing investors last year with glimpses of profitability. Now that the company is at least a year away from returning to profitability -- as revenue growth decelerates to a 50% to 53% clip -- don't blame investors if they continue to enjoy the service but turn the dial on Pandora as an investment.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article.



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NicoleHerrera

Why not try www.earbits.com? Unlike Pandora, you cannot see any ads or commercials while streaming the music. Aside from that, you can access it for free without any subscription or upgrading your account to a premium one.

June 05 2013 at 10:52 PM Report abuse rate up rate down Reply
Wayne Bradshaw

The City Council is examining a request to open a Gucci Outlet Store and retail shop at 11502 Middlebelt in the Livonia Crossroads shopping center on the southeast corner of Plymouth and Middlebelt roads.The council heard at a study session on Monday from Taylor Bond, president of Children's Orchard, who wants to open a 7,500-square-foot Gucci Outlets store at the site of the former Family Buggy restaurant, which was closed several years ago.

May 06 2012 at 12:03 AM Report abuse rate up rate down Reply
VJ Zon

There are many alternatives to Pandora radio that give you greater control over what you listen to. For example http://www.fuhshniZZle.com uses YouTube to allow users to build a video playlist library without Vevo advertisements and offers a built in social networking and browser feature so you can share your video playlist library with your social network. They even offer a full discography feature so that you can search YouTube by album for any recording artist or group. That's why I use fuhshniZZle.com and canceled my Pandora and Rhapsody accounts!

March 09 2012 at 11:31 PM Report abuse rate up rate down Reply
VJ Zon

There are many alternatives to Pandora radio that give you greater control over what you listen to. For example http://www.fuhshniZZle.com uses YouTube to allow users to build a video playlist library without Vevo advertisements and offers a built in social networking and browser feature so you can share your video playlist library with your social network. They even offer a full discography feature so that you can search YouTube by album for any recording artist or group. That's why I use fuhshniZZle.com and canceled my Pandora and Rhapsody accounts!

March 09 2012 at 11:31 PM Report abuse rate up rate down Reply
er2blu

Yet another company that will supposedly ..."Never be great again!"... frankly these articles are tiresome and becoming hard to believe

March 07 2012 at 4:55 PM Report abuse rate up rate down Reply
rspolo

Simple solution for Pandora... Push indepenant artists as much as possible... their target should be to cut royalties in half... Their engine is perfect for this application, once they have a handle on somones preferences based on popular artist they can start to mix in more and more profitable artists. They can even start to provide direct royalties to the independants RIAA will have a fit but will have to play along or give up access to over 10 billion listing hours from 47 million consumers..Pandora might even be able to use this as leverage for discounts from RIAA..

March 07 2012 at 2:28 PM Report abuse rate up rate down Reply