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Investment Overview for Pandora (NYSE:P)
Below are key drivers of Pandora's value that present opportunities for upside or downside to the current Trefis price estimate for Pandora:
- Increased growth rate of Pandora's active users: We currently expect Pandora's active user base to continue increasing over the remaining Trefis forecast period even though we expect the growth to decelerate over time. However certain factors such as mobile internet usage growth, Pandora's expanding sales force, the company's foray into the automobile segment, additional content, and most importantly, international expansion can lead to an increase in the growth rate of Pandora users. If these factors can grow Pandora's active user base to a level 20% higher than what we currently forecast, there can close to 15% upside to the Trefis price estimate.
- Growth in mobile monetization: Along with the increase in mobile internet usage, mobile advertising spending is expected to grow rapidly. Pandora's music app is already one of the most popular apps in the world and thus places the company in a strong position to capitalize on the expected mobile advertising growth. Interesting mix of advertising options on Pandora, higher user interaction on Pandora ads, and expansion in other territories could make Pandora attractive for an increasing number of businesses. If the above factors increase our end-of-period forecast for mobile monetization by about 10%, there could be close to 5%-10% upside to the Trefis price estimate.
- Decline in growth of active Pandora users: Pandora's active user base has increased exponentially in the recent past ad we expect this figure reach 120 million by the end of our forecast period. However, the total number of active Pandora users could soon hit the ceiling if the company is unable to expand its service offering internationally due to continued music licensing restrictions, and competitors such as Clear Channel, Spotify and possibly Apple make a serious dent into Pandora's growth. If, as a result, Pandora's active user base grows to only about 100 million by end of our forecast period, there could be downside of about 15% to the Trefis price estimate.
- Increased content acquisition costs could offset Pandora's ad revenue: Content acquisition expenses principally consist of royalties paid for streaming music to the listeners. While internet radio royalty fees are expected to rise with time, increasing number of users and increasing listener hours will also require Pandora to pay more royalties in the per track fee agreement. Pandora maybe be unable to favorably renegotiate royalty rates with the Copyright Board. If this implies that Pandora can not bring down these costs (as % of revenues) below 45%, there could be more than 20% downside to Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Pandora at the top of the page.
Pandora is a leader in internet radio in the U.S. and stands out in its ability to offer a unique and personalized internet radio experience to listeners. By analyzing the intrinsic qualities of music the firm is able to create stations and then adapts playlists in real-time based on user feedback. Pandora has over 200 million registered users and more than 76 million active users.
At the heart of Pandora is its Music Genome Project and its specialized algorithms for generating playlists. This technology delivers music based on each individual's preference and taste. The extensive musicological database of the Music Genome Project has been meticulously built by a team of professional musicians and musicologists analyzing up hundreds of attributes for every song in their vast collection, to capture the fundamental musical properties of each recording.
Pandora's major source of revenue are through advertisements it serves on its mobile and web platform. Pandora provides a great marketing platform for advertisers. Some of its salient features include:
Growth in monthly mobile listener hours
In the past few years Pandora has seen wider acceptance of its music streaming services through mobile platforms. In 2008, listener hours on mobile devices represented around 4.6% of Pandora's total listener hours over both online and mobile devices. This figure now stands well over 80%.
Higher user interaction in Pandora ads
Pandora's uncluttered listener interface maximizes the impact of advertisements. Pandora's display and video ads show up when listeners click on Pandora features such as thumbs-up, thumbs-down, changing a song. Currently Pandora serves less than one minute of audio ads per hour of listening. This guarantees greater consumer interaction and creates a longer lasting impact of the advertisement.
Demographic specification for advertisers
Pandora streamed about 20.03 billion hours of music in 2014, registering a growth of more than 20% over the preceding year. As Pandora streams music, it can precisely tell the audience size at any given time. It allows advertisers to reach individual listeners based on their age, gender, zip code and music preference.
Growing smartphone market
Global smartphone shipments are on the rise and totaled roughly 1.167 billion for 2014, reflecting an increase of over 25% as compared to the previous year. IDC forecasts smartphone shipments to grow to 1.9 billion by 2018, with a CAGR of 9.8%. Given that 80% of Pandora's listening is happening on mobile platform, the continued growth in the smartphone market will aid its usage growth.
Pandora targeting the automobile market
In 2010, Pandora joined hands with Pioneer, an electronics manufacturer to provide internet radio in cars. Companies like General Motors, Hyundai and Toyota have announced plans to launch vehicles with new systems that will stream online radio from Pandora. Pandora has also developed relationships with major automobile manufacturers, including Ford Motor Company, Mercedes-Benz and MINI (BMW Group), and with suppliers of major automobile manufacturers, to integrate the Pandora service into current and future automotive sound systems.
In 2014, Pandora’s vice president of strategic solutions, Heidi Browning, claimed that all the best-selling passenger vehicles in the U.S. have Pandora services installed. This indicates that the company has a tremendous opportunity to increase its share of total radio listening in the U.S. with an aggressive foray into the new vehicle space, given that it currently holds just 9% of the market.
The radio ad industry, which stands tall at $17.6 billion, generates almost 50% of its revenues from cars, while this medium accounts for just 44% of the total listening hours. This indicates that ad revenues per 100 listener hours in car radios is slightly higher than other medium, which gives Pandora all the more to focus on this market.
Threatening competition, especially from Spotify
Competition has gone up in the past few years with relatively new services such as Clear Channel Radio's iHeartRadio and Apple's iTunes Radio challenging Pandora's unique ability to serve personalized music. In addition to this, the launch of music service by Microsoft could further make life difficult for Pandora. As Pandora expands more in automobile segment, it will face challenge from Sirius XM.
Spotify is another strong player which has been growing strongly in the U.S. market. Early in 2015, Spotify reported 60 million users, up from 40 million in mid 2014. In December 2013, 27% of the total Internet users in the U.S. were using Pandora, while the figure for Spotify was at 6%. 11 months later, around 51% of Internet users were listening to music on Pandora and 14% were using Spotify. Although improvement for both the players was significant, Pandora is likely to reach a saturation point soon, but Spotify still has a lot terrain to cover, which is clearly threatening for Pandora.
Internet radio royalty fees to rise
Copyright Royalty Board has set the royalty rates for Pandora internet radio. These rates do not apply to the satellite radio as internet is a different medium. The rates are on a per performance basis i.e. if 100 users listen to one song then it is counted as 100 performances. While rates for 2010-2015 were as given below, they were not set for years beyond 2015.
Year Rates per Performance
However, SoundExchange has now proposed a significant rise in royalty rates for Pandora. SoundExchange has proposed rates at $0.0025 for 2016, and $0.0001 rise every year thereafter. Even after negotiations, we believe that the Copyright Royalty Board will set rates closer to SoundExchange’s proposal, keeping songwriters' interest in mind. This will lead to a significant rise in content acquisition cost for the company.
Trefis Forecast Rationale for Total Registered Pandora Users
This refers to the total number of registered users of Pandora.
Pandora's registered user base grew from 22 million in 2008 to more than 125 million in 2011. We expect the user base to increase considerably over the Trefis forecast period while we expect its rate of growth to steadily decline.
Trefis considered following factors for its forecast:
- Growing smartphone market
- According to Gartner's estimates, about
172 million smartphones were sold in 2009. This was an increase of 24% from 2008 numbers. The fast paced growth accelerated in 2011, when Gartner reported that Q3 2011 smartphone sales amounted to 115 million units, registering a growth of 42% over Q3 of 2010. For the full year 2011 the smartphone sales stood at over 430 million units.
- The smartphone market is expected to grow at a healthy pace. Pandora's music app which is available for the iPhone, Blackberry, Android, Windows Mobile and Palm is already one of the most popular apps. As the smartphone market grows, Pandora is expected to expand its mobile subscriber base.
Pandora push in cars
- In January 2010, Pandora joined hand with electronics manufacturer Pioneer to provide internet radio enabled music systems for cars. The device detects Pandora settings when a phone is connected with the system and will be able to play internet radio.
- Since then, Pandora has struck deals with world's leading automotive manufacturers . This move is expected to result in higher subscribers as Pandora will now not only be available on PCs, cellphones but also automobiles, thereby providing a complete solution to a consumer.
- Pandora has highlighted its intention to expand its operations in international markets as part of its long term strategy. While royalty costs at the moment maybe expensive, we believe that over time they will come down and provide an opportunity for Pandora to sign licensing agreements to promote content on Pandora's channels.
Back to Company Overview
- Competition from broadcast radio
- Pandora acknowledges that biggest competitive threat is still the broadcast radio
- Clear Channel has launched its iHeartRadio app and website in a direct assault on Pandora
- Clear Channel is challenging Pandora's uniqueness by offering users the ability to create personalized stations from a song catalog that is 10 times the size of what Pandora offers and providing a range of artists that is 5 times bigger.
- Pandora may find it difficult to sustain high user base growth in future
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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