How Pandora Plans To Generate More Revenues Amid Threatening Royalty Rates

Pandora Media (NYSE:P) launched its IPO in 2011 at $16 per share and saw its stock price reach an all-time high of $40 in March last year. One year later, a significant slowdown in subscriber growth and skepticism regarding the long-term sustainability of its business model have pushed the company’s share price below its Initial Public Offering. The company’s subscriber growth stood at just 7% in 2014, significantly below 2013’s 16% and 2012’s 38%, clearly implying that its subscriber base is nearing saturation. Moreover, at the moment, Pandora’s bottomline is more than threatened by the potential increases in royalty rates 2016 onward.

The only way the Internet radio company can survive in the industry if the rates rise in 2016, is by growing its revenues at a rate faster than the rise in content acquisition costs. Pandora can either do this by switching to a subscription model or by increasing its ad revenues at an aggressive pace. For a company like Pandora, convincing buyers to pay for ad free music isn’t easy, given that it does not offer the best content in the market. Songza’s content is arguably much better than that of Pandora’s and only 25% of its users pay for ad free music.

Since adopting a subscription model seems a little far-fetched for Pandora, a more realistic way for propelling top-line growth is to generate more revenues through ads with effective inventory selling. The company is already in the process of ramping up its sales team for this purpose and is seeing some promising results as well. However, in order to convince advertisers to choose Pandora over other advertising channels, the Internet radio company needs to reassure them that they will get ample visibility through its mobile and desktop apps. To ensure this, the company has to grow its active user count and encourage existing and new users to increasingly tune into its apps. Unfortunately, this plan will be a double-edged sword for the company because as the number of listener hours grows, content acquisition cost will go proportionately, and by not effectively monetizing the business, Pandora may end up losing more money. Therefore, convincing users to tune in again and again is important for Pandora, but generating more revenues per customer is indispensable. Given that Pandora holds almost 10% share in terms of listener hours, but just 3%-4% share in ad revenues, there seems significant scope for improvement.

See our complete analysis for Pandora Media

Pandora’s Chief Marketing Officer said in an analyst day presentation that encouraging existing users to use the company’s services frequently is more important than getting more people to register for the app. ^[1] This makes sense since Pandora has over 200 million registered users and only 81 million of them are active. Potential advertisers will be more intrigued by an increase in the 81 million figure rather than the 200 million figure. Also, if those 81 million users tune into Pandora more frequently, the Internet radio company’s sales team would make a better case in front of the advertisers.

For this purpose, Pandora is trying to provide a complete service solution to its listeners. Car radio listening accounts for over 50% of total traditional radio listening in the U.S., but Pandora reports that its apps installed in cars make an insignificant contribution to its total listener hours. Having identified a tremendous opportunity for improvement, the company is aggressively pushing into the car market, working with 25 automakers and car software platforms such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Although currently only 9 million people have Pandora installed in their cars, the figure is growing rapidly. In fact, it has doubled over the last one year. Also, Pandora is integrating its apps with Google Now cards and is sending reminder notifications to users. It has developed a new app for Xbox One that uses gesture and voice commands instead of conventional screen touch to manage music. The company is even introducing a mini subscription plan, where users can pay $0.99 a day to listen to ad-free music. Pandora continues to send customized reminders to registered users on their email ids, hoping for positive response, but has seen minimal success on this front.

Pandora needs to asses the advertising market effectively and build an efficient sales force, because success in increasing listener hours and inefficiency in selling inventory slots will only intensify its profit decline.

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap | More Trefis Research

1. Pandora tries to convince investors it can reignite growth, Yahoo Finance, Mar 17 2015 [↩]