Is mobile actually hurting Pandora?

Faith Merino · June 10, 2011 · Short URL:

Poor mobile CPMs could be undermining Pandora's IPO

Is Pandora worth $10 to $12 a share? Based on Pandora’s financial outlook, BTIG Research is saying no.

BTIG Research released a report Friday on Pandora’s IPO and came to the conclusion that the company’s current situation does not justify a $10 to $12 share price. Earlier on Friday, Pandora issued an amendment to its S-1 to raise its share price to $10 to $12 per share from the previously decided upon $7 to $9 share price, which values the company at $1.9 billion.

So what’s with all the hatin’? BTIG’s main issues are with Pandora’s financials, its business model, and its reach. The research firm notes: “While Pandora is creating a large active user base, its reach/frequency continues to pale in comparison to terrestrial radio, as does its profitability.” To be fair, Pandora has the largest share of digital music listeners with nearly 60% of the market.

One of Pandora’s biggest draws is its lack of advertising. The service devotes less than one minute of advertising per hour compared to 13 minutes per hour with terrestrial radio. But that could actually be the company’s biggest weakness.

Pandora has been one of the singular online success stories of the decade. The company went from broke and paying employees in IOUs to making millions, due chiefly to Westergren’s decision to make the service a direct-to-consumer music service in 2005. But Pandora’s real success took off when it went mobile. As mobile devices became more advanced, users were able to multitask and listen to Pandora on the go on their smartphones.

While Pandora has drawn tens of millions of new users (and continues to add another three million each month), Pandora’s CPMs have taken a hit as more subscribers are listening to Pandora from a mobile device. While Pandora hasn’t given exact numbers, BTIG estimates a $43 CPM in 2011 compared to a $20 CPM for mobile. Three years ago, Pandora was streamed online almost exclusively from a PC, but today, 60% of all listening time occurs on a mobile device.

Says BTIG: “For each mobile listening hour that cannibalizes a PC-based hour, against which the company is paying a fixed cost, Pandora is being hurt by deleveraging (from a profitability standpoint).”

And approximately half of all new users who subscribe to Pandora do so from a mobile device.

There are other problems that BTIG notes: the cost of paying out royalties to music labels eating up profits, increasing competition from other services getting into the digital music space (think Spotify), difficulty with international expansion given the complexities of royalties when you take the business overseas, and more. But in summary, the firm does not believe that Pandora’s financial outlook justifies the IPO price range. Pandora’s revenue could reach $264 million by 2012 and possibly exceed $1 billion in 2015 (compared to $137 million in 2011), but the firm forecasts losses in 2012 and 2013 (which shouldn’t surprise anyone—Pandora already warned investors it would likely be losing more money in 2012).

What is surprising it that based on its estimates, BTIG Research believes that a more appropriate IPO price for Pandora would be $4 to $5 a share, and advises investors against investing in Pandora at its current rate.

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Pandora, the leading internet radio service, gives people music they love
anytime, anywhere, through a wide variety of connected devices: laptop and
desktop computers, smartphones, connected BluRay players, connected TVs,
etc. Personalized stations launch instantly with the input of a single “seed” –
a favorite artist, song or genre. The Music Genome Project®, a deeply
detailed, hand-built musical taxonomy, powers the personalization or
Pandora. Using this musicological “DNA” and constant listener feedback
Pandora crafts personalized stations from the more than 800,000 songs that
have been analyzed since the project began in January 2000.
More than 75 million people throughout the United States listen to
personalized radio stations for free on Pandora through their PCs, mobile
phones and devices such as the iPad, and connected in-house devices
ranging from TVs to set-top boxes to Blu-Ray players. Mobile technology has
been a significant factor in the growth and popularity of Pandora, starting
with the introduction of the Apple app store for the iPhone in the summer of
2008. Pandora instantly became one of the most top downloaded apps and
today, according to Nielsen, is one of the top five most popular apps across
all smartphone platforms.

Pandora is free, simple and, thanks to connectivity, available everywhere
consumers are – at the office, at home, in the car and all points in between.
In 2009 the Company announced that Pandora would be incorporated into
the dashboard in Ford cars via SYNC technology; GM has already followed in
announcing plans to integrate Pandora into its vehicles and Mercedes-Benz
introduced their Media Interface Plus device that works with the
free Pandora iPhone app to provide direct control of Pandora from in-dash
stereo controls. This was all great news for the millions of Pandora listeners
who had been plugging their smartphones into car dashboards to listen to
personalized stations while driving. More than 50 percent of radio listening
happens in the car, making it a crucial arena for Pandora.

Today tens of millions of people have a deeply personal connection with
Pandora based on the delight of personalized radio listening and discovery.
These highly engaged listeners reinforce the value Pandora provides to: 1)
musicians, who have found in Pandora a level playing field on which their
music has a greater chance of being played than ever before; 2) advertisers,
who benefit from the multi-platform reach of Pandora, as well as its best
practices in targeting consumers for specific campaigns; 3) the music
industry, which has found in Pandora a highly effective distribution channel;
and 4) automobile and consumer electronics device manufacturers, who have
noted that incorporating Pandora into their product makes it more valuable
to consumers.

Pandora continues to focus on its business in the United States. The radio
arena has never been hotter, thanks to technology that enables radio to be
personalized to the individual and more accessible than ever before. Right
now millions of people listen to Pandora in the United States and we hope
someday to bring Pandora to billions of people around the world.

• 2000 – Tim Westergren’s Music Genome Project begins.
• 2005 – Pandora launches on the web.
• 2008 – Pandora app becomes one of the most consistently downloaded
apps in the Apple store.
• 2009 – Ford announces Pandora will be incorporated into car
dashboard. Alpine and Pioneer begin selling aftermarket radios that
connect to consumers’ iPhones and puts the control and command of
Pandora into the car dashboard.
• 2010 – Pandora is present on more than 200 connected consumer
electronics devices ranging from smartphones to TVs to set-top boxes
to Blu-ray players and is able to stream visual, audio, and interactive
advertising to computers, smartphones, iPads, and in-home connected


Tim Westergren

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