Pandora might be looking to put itself up for sale

Steven Loeb · February 12, 2016 · Short URL:

The company has struggled recently as its user numbers have declined due to competition

Pandora may be the largest music streaming service out there, but the company has been struggling a bit as the competition has increased and users have begun to test out other services. Pair that up with the huge amount of money it's paying out in royalties, and you get the feeling that Pandora has seen better days.

Still, it was pretty surprising to see a report in the New York Times on Thursday that Pandora was actually considering selling itself, working with Morgan Stanley to meet with prospective buyers.

Of course this is is just a rumor, and even those sources who spoke to the times said that talks are preliminary and may not lead to a deal. 

The timing of the report was interest, as it came out just before the company reported its fourth quarter earnings. The news excited investors enough to send the stock up 15 percent, ending the day with a gain of 8.45 percent, to $9.11 a share.

When the numbers were released, though, the company gave nearly all that back, dropped 5.93 percent in after hours trading.

The company posted $336.2 million in revenue, an increase of 25 percent year-to-year, beating expectations of $331.83 million. Earnings per share were $0.04 earnings per share, lower than the $0.07 that Wall Street had been anticipating.

There were two important figures in this earnings report, both of which may point to why Pandora is considering a sale.

First, for the full year 2015 the company had $1.2 billion in revenue, up from $920.8 million in 2014. However it still managed a net loss of $170 million for the year, up from a net loss of $30 million the year prior. Despite making a really nice amount of revenue, Pandora is still in the red.

The other important stat are its user numbers. For 2015, Pandora'a active listeners were 81.1 million at the end of the fourth quarter of 2015, compared to 81.5 million for the same period of the prior year, a loss of 400,000 users. So the company is losing money, and losing users.

Those two stats get to the heart of what is wrong at Pandora right now. The problem with decreasing user numbers is easy to figure out; everyone and their mother is starting a music streaming service these days, and there are only so many ears and only so many hours to listen. Apple Music has at least 15 million users, and they have to come from somewhere.

The other problem, with its inability to remain profitable, has been an issue for Pandora for its entire history, and is just a fundamental flaw with its business model, where it made the majority of its revenue in 2015, $732 million, from advertising.

The more songs that listeners access, the more ads Pandora will sell, and the more money the company will get. That obviously works in Pandora's favor, and allows them to offer the service to its users for free.  But, at the same time, the more songs that users play, the more Pandora has to pay out in royalty fees. And that is causing the company's big headaches. 

In September of last year, CEO Brian McAndrews revealed that Pandora had paid out a total of $1.5 billion in royalties, and $500 million through the first nine months of 2015 alone.

Pandora did score a victory last year when the U.S. Copyright Office ruled that a royalty payment rate agreement between Pandora and  Merlin Network, a global rights agency for independent musicians, was a valid way to determine what the legal rate should ultimately be for Internet radio play. If the company does get its way, and a panel agrees to royalty rate of $0.0013 per stream, it will allow the company to become profitable.

The company does have a subscription service that it offers, which is began building out more in late 2015. However it should be noted that Spotify, one of Pandora's biggest competitors, makes its money from a subscription service, and it too is in the red because of royalty fees.

I reached out to Pandora for a statement or comment on the report, but a company spokesperson referred me to comment made by McAndrews when he was asked about the topic during the company's earnings call.

McAndrews was actually asked about it twice, with the questions coming back to back. First Barton Crockett from FBR Capital Markets & Co. asked about the rumor.

"We don't want to comment on rumors. We'll say that we're very confident in our ability to continue to drive significant value for our shareholders by executing the strategy that you've heard us talk about and that's where we're focused on," McAndrews responded.

He was then asked by Robert Peck, of SunTrust Robinson Humphrey, whether an M&A deal made sense at all.

"I don't know how to answer that, this is not something we are focused on, we are focused on working as an independent company and driving our business and we're a public company and all that that entails<' is how McAndrews answered. 

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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