Has Pandora Media's Advertising Destroyed its User Experience?

John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I’ve been a loyal Pandora Media (NYSE: P) listener for many years. Until now.

Despite its position as the leading Internet radio service, Pandora’s history as a public company has been a turbulent ride for investors. Shares came public in June 2011 at $16 per share, before losing more than 50% of their value to $7.08 in November 2012. Concerns over the launch of iTunes Radio by Apple pushed the stock to all-time lows.

Headline risk has been the dominant theme for Pandora shareholders. The stock has ebbed and flowed like the ocean tide, depending on the latest news flow.

Fast-forward to the present, and Pandora Media reached an all-time high of $20.54 in early July. Investors are choosing to ignore the obvious issue that competitors Apple and Google are launching their own music services, giving full confidence to Pandora’s monthly listener figures, which indicate a burgeoning subscriber base.

I’ve written negatively on Pandora time and time again, citing the company’s inability to turn a profit and monetize its listening hours. Royalty costs have been rising at a faster rate than advertising revenue. New listeners will only exacerbate the problem, not resolve it.

A new concern

My current article is dedicated to a new and overlooked element: the Pandora Radio user experience. Few on Wall Street have commented on Pandora’s decision to roll out numerous “software improvements” to its radio service. These updates have made little actual improvement; instead, the overall user experience has declined dramatically.

The recent actions of Pandora Media are a huge game changer for investors, and a negative one at that. Hidden within the bug fixes and performance enhancements is a dramatic increase in advertising and a decrease in listening options. The company appears to have reached an ultimatum with its free listener base, which is unwilling to pay $4 per month for a premium radio service.

Faced with rising royalty costs, Pandora made the decision to abandon its traditional model and deliver a massive advertising increase to its customers. Listeners are faced with a 15-second or 30-second radio advertisement as frequently as every 2-3 songs, compared with 5-6 songs in recent past. Free radio listeners can no longer skip through multiple songs; instead, you are required to listen to the current song or switch to a different radio channel altogether.

All in all, the originality and flexibility which attracted millions of users to Pandora Radio appear to be waning. Listeners are now faced with more advertising on Pandora’s Internet radio than with a traditional radio broadcast.

Can Pandora attract quality advertisers?

A potential reason for the rapid increase in advertising volume is Pandora’s inability to attract quality advertisers. There are several explanations for this, including an inadequate ROI for brand-name corporations that took a stab at Internet radio. The math is simple--if Pandora cannot attract advertisers at a respectable premium, the company is forced to balance supply with demand by lowering its advertising rates.

Listeners are now faced with advertisements to download the latest game craze for their iPhone or Android devices, instead of credible advertisers that bring legitimacy to the Pandora platform. Discount carrier Southwest Airlines, the University of Phoenix (owned by Apollo Group), and Universal Pictures (owned by Comcast) are among the few respectable advertisers in a pool of ads to download the latest smartphone game.

Retail giant Wal-Mart (NYSE: WMT) is the latest Pandora Media poster-child. Video advertisements for Wal-Mart began appearing with Version 4.4 of Pandora Radio, released on July 8. The 30-second advertisement shows a number of Wal-Mart employees being asked about their career paths, and reaches the conclusion that up to 75% of Wal-Mart store managers began their jobs as an entry-level associate.

I once heard a quote, “When your work speaks for itself, don’t interrupt.” Similarly, if your business has a strong reputation, it’s not necessary to spend valuable advertising dollars to maintain a positive public image.

In the case of Wal-Mart, the company is engaging Pandora listeners as part of a larger public advertising campaign. The Bentonville, AR headquartered Wal-Mart launched a national initiative in May 2013 to show “The Real Walmart” as it struggles to maintain a positive image with its American consumer base.

Wal-Mart is likely to incur a heightened level of social and legal pressures in the next five years. On July 10, lawmakers in Washington, D.C. gave final approval to require large retailers to pay their employees at least 50 percent more than the city’s minimum wage. The District of Columbia mandates a $8.25 minimum wage, a dollar higher than the federal minimum wage. The July 10 ruling by lawmakers will require Wal-Mart to pay its employees at least $12.50 an hour once the bill is signed by D.C. Mayor Vincent C. Gray.

Following the D.C. ruling, Wal-Mart corporate announced it was abandoning plans to open three new stores in the District. Lawmakers responded by saying, “We’re at a point where we don’t need retailers. Retailers need us.”

Wal-Mart appears expensive at the higher end of its historical valuation range. The company has also lost market share to smaller footprint dollar stores in the last three years, such as Dollar General and Dollar Tree. On a final note, Reuters is reporting that Wal-Mart is beginning to hire temporary workers rather than permanent employees at its stores. This contradicts the national advertising campaign which is currently being run by the company.

Foolish takeaway

For a company with a market capitalization of $3 billion, Pandora Media trades similarly to a penny stock, the junk food of personal finance.

Fundamentals at the company are deteriorating as management has decided to expose its listener base to a massive number of advertisements and restrict listening options. I believe this will ultimately cause customers to lose their loyalty for Pandora Radio and migrate to new offerings such as iTunes Radio from Apple.

I consider Pandora Media to be non-investable for Fool readers who seek to own companies for the long-term.

Wal-Mart could endure further market share losses to the dollar stores in coming years, and the company is likely to face increased scrutiny from local government and employees following the resounding victory by D.C. lawmakers. I recommend staying away from the stock.

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John Macris has no position in any stocks mentioned. The Motley Fool recommends Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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