Pandora: True to Its Name?
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First things first: I think Pandora (NYSE: P) is a pretty spiffy name for a company. Positioning your business at the intersection of entertainment and the origin of all human suffering is a bold move, to say the least. So props, Tim Westergren, founder and CEO: your Greek-mythology aping tactics have charmed at least one Lit kid. Of course, there's more to a company than a name. For example:
As everyone from Sean Parker to every movie director who has ever wanted to use a Stones song knows, the music industry is pretty big on getting what’s coming to it. This has been emphatically the case in recent years, in which the culture shift from CD to mp3 has made the business of capitalizing on recorded sound an increasingly perilous endeavor…there is, after all, very little to keep a marginally competent internet user from simply taking whatever album strikes his fancy. At least, that’s what my friends tell me.
Now enter Pandora. Rooted in the algorithms of the impressively named Music Genome Project, the internet-radio service asks its users to pick a song and, using nothing but that and their reaction to subsequent offerings, attempts to craft a channel built exclusively around their musical talent. From a conceptual standpoint, it’s a very cool idea, appealing in the same way as a tailor-made suit. From a business standpoint, though, there’s decidedly less to write home about. Remember that music industry we were talking about? Turns out they have a way of making the middle-man pay; in the case of Pandora, they’ve got them by the...earbuds.
In the six months ended this past July 31, content acquisition accounted for $63m (roughly half) of Pandora's total costs and expenses, up $35m from the same period in 2010. That jump, as it turns out, is frighteningly similar to the increase in listener hours (the metric by which the company attracts advertisers): 1.5b and 3.4b in the six months ended July 31, 2010 and July 31, 2011, respectively. Add in capital expended on hosting services to handle all that additional toe-tapping, and it’s no wonder they’ve spent the last three quarters in the red. Barring massive and simultaneous fits of charity on the part of the Copyright Royalty Board, Broadcast Music, Inc., and the American Society of Composers, Pandora’s only hope for a profitable future is, by their own admission, a substantial increase in advertising revenue.
Problem solved? Maybe not.
A tad dramatic, I know, but consider the following:
1) In 2010, 23.5% of Pandora’s listener hours came from smartphone usage, up 18.9% from the year before. The stat for 2011: 50.5%
2) The ratio of media time experienced via smartphone and advertising money spent on that same platform is 16:1. To give you a frame of reference, old-school internet clocks in at 5:4, and TV…1:1.
3) Social networking sites account for a commanding 30% of all ad units displayed on American websites. That’s 9% higher than search portals, and more than double the stats of entertainment sites such as Pandora.
Which brings us to the Big Picture
As smartphones become less status-symbol and more way-of-life, Pandora is only going to see more and more of their listener hours coming from that direction. As advertisers become more confident in their ability to work profitably within the smartphone platform, that 16:1 ration will start to even out. And predictably, and perhaps most damningly for Pandora, as ad money starts to flow into smartphones, there's a healthy chance that it will go first and foremost to the places it already loves: Facebook, Google, and whatever site Kanye West uses to share his thoughts with the world.
Looks like Westergren was right...his company might be a box full of problems.
Lyons George does not hold a position in any of the above-mentioned companies.