What Do Pandora’s Recent Acquisitions Have To Offer?

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Pandora Media (NYSE:P) is doing a variety of things to ensure that a rise in royalty rates does not ruin its future. Last week, the company signed a direct licensing agreement with the largest music publisher, Sony/ATV, to secure greater rate certainty and an improved content portfolio. A month back, the Internet radio provider had made its way into the ticketing business with the acquisition of Ticketfly for $450 million in a cash and stock deal. [1] Ticketfly, a competitor to Ticketmaster, is expected to assist Pandora in improving services for artists, who are otherwise not too happy with the company due to its low royalty rates. Most recently, Pandora unveiled its plans to acquire assets of Rdio, a music service popular for its design and social-media quotient but nearing bankruptcy, for just $75 million in cash. [2] Rdio’s assets, including its technology, staff and intellectual property, can add new features to Pandora’s music platform and strengthen its competitive position against Spotify.

Pandora’s revenues have grown strongly over the past few years, but soaring expenses have dampened profits. And as royalty rates are certain to increase at a faster than historical pace, the company needs to up the ante on its topline front. Better content and improved features can allow Pandora to attract more advertisers in the local and national arena, and can even help accelerate its subscriber conversion rate. Currently, the Internet radio company does not have the depth or the competitive advantage to convince users to pay for its ad-free services. And its interactive ad features, that do not interrupt the listening experience, work against it in this case.

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Our current price estimate for Pandora stands at $19, implying a significant premium to the current market price.

See our complete analysis for Pandora Media

Ticketfly: Better Payouts & Visibility For Artists – A Stronger Case For Direct Deals

Pandora bought Ticketfly, an online ticket vendor, for $450 million in a cash and stock deal back in October. With this acquisition, the company entered the ticketing business, which helps it in two ways. Firstly, Pandora will directly benefit from revenues coming in from this area, which can support its quest of growing overall sales faster than expenses. Secondly, the deal will help Pandora improve its relations with a number of artists, who are currently object to the platform due to its ‘unacceptable’ royalty payouts. By promoting and selling tickets for artists’ live shows and concerts, the company will be better positioned when it approaches their music publishers with direct deals, similar to Sony/ATV.

We believe that the Internet radio company should not just sell tickets to these concerts, but also plan to organize them at some stage. This can help Pandora create a different business segment altogether, which can ensure faster revenue growth and a more profitable business model.  It will strengthen the company’s position with artists by offering them an additional source of payment as well. Ticketfly was founded in 2008 to create a simpler platform for promoters, who wanted to avoid the Ticketmaster system. With the use of social media and web for ticket marketing, Ticketfly sold 16 million tickets last year worth $500 million. While Ticketmaster’s acquisition of Front Gate Tickets has posed a serious threat to Ticketfly, we expect the latter can do much better under Pandora, due to its reach. [3]

Rdio – Better Listening Features – A Strong Case For Subscriptions

Earlier this week, Pandora announced that it plans to acquire Rdio’s assets for $75 million, but the music service will have to declare bankruptcy first. Since its inception, the Internet radio company has offered music playlists tailor-made for 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. However, the company lacked the basic feature of on-demand music so far, which will now be added with Rdio’s intellectual property. With added features, listening experience on Pandora’s platform will improve, which can provide some incentives to free users to pay for the services. New on-demand feature and social media component can make Pandora’s platform a little similar to Spotify, where users are more inclined to buy subscriptions.

Rdio was created by the founders of Skype back in 2008 and its clean design and social media features have earned it significant popularity in the online music domain. The company never disclosed its financial or operational metrics, but it was struggling for survival in the unrelenting music streaming industry. Back in 2013, Cumulus Media acquired a 15% stake in Rdio for $75 million, which gave the company an implied value of $500 million. Now, Pandora is paying $75 million for its assets, which indicates that even though Rdio’s business model was unsustainable, its assets are valuable. The company’s deal with Pandora requires it to declare bankruptcy and terminate operations worldwide. [4]

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Notes:
  1. Pandora to Acquire Ticketfly to Create World’s Most Powerful Music Discovery Platform, Pandora, Oct 7 2015 []
  2. Pandora to Acquire Key Assets from Rdio, Pandora, Nov 16 2015 []
  3. Pandora Buys Ticketfly, a Competitor to Ticketmaster, The New York Times, Oct 7 2015 []
  4. Pandora Plans to Acquire the Assets of Rdio, The New York Times, Nov 16 2015 []