Will Pandora Ever Succeed?

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

Note: This post contained incorrect information about Pandora's royalties. It has been corrected.

I love listening to Panodra (NYSE: P), Today's Country Radio is my jam and I have logged countless hours listening to it.  Despite my love, will this company succeed?  Personally, I can't see it happening, and the CAPS community has given it a paltry one star rating, so clearly others agree.  Here are my 3 biggest reasons why I think Pandora will fail.   

Royalty Costs are Not Coming Down 

If you have ever listened to music on Pandora you most likely have had the “Are you still listening? We pay for the songs we play” screen come up.  Pandora currently pays $.0012 per song played, and unfortunately for them that is set to increase in 2015.  Royalties also take 60% of Pandora’s revenue away, a staggering number.   

Pandora’s shares jumped along with those Sirius XM (NASDAQ: SIRI) when the Internet Radio Fairness Act was introduced, but the cold hard truth is that this bill will not be passed.  The bill included a lot more then just decreasing royalties, such as permitting Sirius to sue record owners if they try to stop them from making direct licensing deals with record companies.  This bill is a much bigger issue for Pandora (In 2013, SiriuxXM will pay 9% of gross revenues, as defined in the regulations), and it could be back on the table in 2013.  If Pandora wants it to succeed they must push for some big changes within it.   

Increasing Competition

A large chunk (77%) of Pandora's listeners are from mobile devices, so when Apple (NASDAQ: AAPL) came out with news that they would be creating their own radio to rival Pandora the 20% drop in shares was definitely justified.  If Apple comes out with a quality radio app it will become commonplace on all of their devices (iPhone, iPad) that currently use Pandora.  Reports have said that Apple will be rolling it out in the first three months of 2013, something I am sure the folks at Pandora are not looking forward to.  I don't see another failure for Apple like the Maps gaffe, as there's a much smaller margin for error here.  Apple also is in negotiations with record companies about how to share revenue, while Pandora is locked in.  Time will tell if Apple succeeds in this endeavor, but it is definitely something to keep an eye on.   

Nothing Sets Pandora Apart From Others 

Pandora was the first mover in ad-based internet radio, but past that not much separates them from others (IHeart Radio, Spotify, etc.).  In fact, Spotify might even be better with its unlimited skips and stations, not a bad combination for listeners.  Sadly for Pandora it just comes down to a choice of preference.  Yes people like to stick with what they know, but if something better comes out there isn't anything to keep them from moving right along.  The industry is growing, but at the same time AM and FM radio will not be going away anytime soon.

I will definitely be keeping an eye on Pandora and how it performs in this competitive industry, but I am not expecting to be blown away.     


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