Is Pandora’s (NYSE:P) growth slowing down? Is the company monetizing its mobile platform better? Will it really be able to push royalties down and pave the way for profitability? What is it doing to defend the rising competition?
These are some of the questions that investors will have when Pandora releases its Q3 fiscal 2013 earnings on Dec 4. As per the monthly metrics released by the company, it appears that while the growth remains high, its is gradually slowing down. But that’s not necessarily a bad thing as it gives Pandora an opportunity to catch up with its monetization by selling more ad inventory. Anyhow, we expect Pandora to report robust growth in its upcoming results but expect no respite from cost perspective.
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Robust Growth Metrics
Pandora releases its monthly growth metrics, and as per the data released for August, September and October, the company’s listener hours growth has remained between 65-70% over the same period in 2011. That’s a lot given that Pandora streamed close to 8.2 billion listener hours last year.   However, a gradual decline is visible as the growth rate came down from 70% in August to 65% in October.  International growth can moderate this growth decline to an extent, and we’ll look forward to any color on the adoption of Pandora’s service in . Pandora launched public beta (a test phase) of its service in these two countries in July 2012 (see Pandora Launches Public Beta In Australia & New Zealand)
As far as active users are concerned, they have almost reached 60 million, implying a growth of roughly 48% compared to the Q3 of last fiscal year.  Even though Pandora has about half of the U.S. population covered as registered users, only active users count as Pandora is almost solely dependent on advertisements. Ads pay more if users listen more, it’s as simple as that! We expect user registrations to slow down and expect Pandora to focus on increasing the number of active users.
Strategy Against Competition
Some of the biggest tech giants such as Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), as well as reviving entities such as Myspace have taken steps or given indications that they are going to push into online music market. This spells trouble for Pandora assuming that these competitors will be able to successfully execute their strategies.
Microsoft is launching its new music service that will allow its users to both stream and download the music of their choice. Given the distribution channels available to Microsoft, its spending capability and its customer base, it could be a formidable competitor (see Microsoft’s Entry In Music Could Threaten Pandora’s Future). In addition to this, Apple could launch customized radio service (see Can Apple Kill Pandora With Internet Radio Service?) and Myspace is looking to leverage its vast database of songs worldwide to launch a viable music service of its own.
All of these steps can attract music lovers and lower activity on Pandora’s platform. We’ll look forward to indications regarding how much the company is aware of these threats and what it is doing to address them. Recently, it launched a redesign of its app for mobile listeners but will that be enough?
Update On Content Cost Push
Pandora has been urging its users to support a bill called the “Internet Radio Fairness Act,” which was introduced recently and is under the consideration of the U.S. Congress. This bill is aimed at bringing Internet radio business under the same roof as terrestrial and satellite radio, and address the concerns regarding Pandora’s high royalty payments (see Pandora’s Value Could Double If The Internet Radio Fairness Act Passes). These high costs have stood in the company’s way of becoming profitable and remain by far the biggest risk that it faces.
Besides fighting for royalty rates, Pandora is pushing to improve the monetization of its mobile platform to address the profitability issue. While desktop RPM (revenue per 1000 ad impressions) is over $60, mobile RPM is just around $20-22. There is significant potential of improving this by selling more ad inventory directly to advertisers and the company has been growing its sales team to achieve this. We’ll look for any updates regarding the Internet Radio Fairness Act and Pandora’s success with mobile monetization improvement.
Our price estimate for Pandora stands at $9.60, implying a premium of about 15% to the market price.Notes: