Don't Write Pandora Off Just Yet

Pandora has made the news again with founder Tim Westergren stepping up to the role of CEO, replacing Brain McAndrews. These are certainly uncertain times for Pandora, once the stand out success story of digital music, at least from commercial terms if not always from a songwriter’s perspective. But for all the uncertainty, Pandora remains a vastly important player and in many respects is on sounder footing than on demand streaming services.

Pandora’s headline numbers do not make for great reading. Its market cap has fallen from a high of $7.7 billion in March 2014 to $2.2 billion now, while annual losses quintupled in 2015 to $169.7 million and the monthly active user base has been flat at around the 80 million mark since late 2014. Yet Pandora has much going for it that others do not. Unlike on demand services like Spotify and Apple Music, Pandora’s label rates are set by Sound Exchange, a statutory body set up in the US following the Digital Millennium Copyright Act. This gives it a degree of licensing predictability Spotify et al can only look at enviously.

Crucially though, because Pandora is a semi-interactive radio service it pays a much smaller share of its headline revenue to rights holders. So while on demand services can aspire to a long term gross operating margin of 5% or so (though most are running at a loss as they build market share), Pandora could conceptually get towards 25%. It doesn’t do so yet because it is investing heavily in its ad sales capabilities and in future revenue streams. In fact Pandora has built the foundations of a Full Stack Music company by purchasing Rdio, Ticketfly and Next Big Sound.

Those acquisitions set up Pandora well for building a set of diverse revenue streams around music, especially if it dives into the generally loss-leading world of on demand. But the real value in Pandora lies in this statistic: 10%. That is the share of total US radio listening time that Pandora currently accounts for. And that metric is one that is growing year on year. Radio in the US alone is an $18 billion market, compared to $4.9 billion for recorded music (at trade values).

Both iHeart Media and Sirius XM have been mooted as potential buyers. Both would be a good fit because they are both threatened by Pandora. If Pandora was able to convince Wall Street of its long term narrative it probably wouldn’t be in the position of needing to even consider a sale. But Wall Street rarely has that sort of patience with tech stocks, especially when Spotify and Apple keep posting dynamic growth stats. And for all that Pandora may try to claim otherwise, there is no denying that they do compete with Pandora. Even if Pandora doesn’t go the distance, though the odds are still in its favour, the Pandora model is the future of radio. And put bluntly, the future of radio is a bigger bet to back than the future of music. Like it or loathe it.