Pandora Disappoints Again; Needs Its Revival Efforts To Kick In

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Nothing seems to be going right for Pandora, despite its desperate efforts to trigger a revival. In the recently concluded quarter, the company’s revenues and earnings once again fell short of analysts expectations, which sent the stock crashing down. The Internet radio provider relied on advertisement for far too long before trying its hands out on alternate revenue sources with Ticketfly and Rdio acquisitions. However, it may be too late for Pandora considering the relentless competition in the digital music space from players who are undoubtedly better equipped than Pandora. The Internet radio company’s users have started declining and advertisement revenues aren’t growing fast enough to outrun the rise in content costs. The subscription side of the business still remains small mainly due to a comparatively weak music library, though Pandora can expect some growth on this front with its $5 a month subscription that offers offline playback and lets users skip songs. Even the launch of an on-demand feature can help Pandora to an extent, but missing social components similar to what Apple, YouTube, and Spotify offer can prove to be a limitation.

Disappointing Results

For the third quarter of 2016, Pandora reported 13% growth in its net revenues to $352 million, which fell a bit short of the analysts estimates of $366 million. Both the advertising and ticketing side of the business reported revenues below expectations despite registering 7% and 25% growth respectively. Top line growth has never been an issue for Pandora, but once it is put in perspective with its bottom line, the scenario has always been gloomy. For the quarter, the company reported a loss of 7 cents a share, worse than the expected figure of 6 cents a share. And now, even the company’s active user base is falling with Spotify and Apple Music taking charge of the domain. During the third quarter, listener count fell to 77.9 million from 78.1 million in the same quarter last year. While the fall isn’t alarming at the moment, even the company’s advertising side of the business may end up in a spot of bother should it fail to curb this decline.

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Following its disappointing Q3 results, Pandora even lowered the revenue guidance for the full year from $1.39 billion – $1.41 billion to $1.35 billion to $1.37 billion, which doesn’t really bode well for its existing situation. It is high time Pandora starts showing some improvement in its bottom line, but apparently even its top line seems to be fumbling.

The Way Ahead

Towards the end of last year, Pandora made two notable acquisitions that raised investors interest, because both of them were aimed towards revenues streams other than advertising. The company bought Ticketfly for $450 million to add a new business to its portfolio, one that was not directly related to content. This seemed like a valid move as the company would be able to add a new revenue stream without any increase in content costs. However, Pandora hasn’t been able to justify this expensive acquisition so far as the revenues generated by the segment have been nominal. Nevertheless, it remains a move in the right direction and the company can leverage its reach and brand image in the U.S. to turn this small business into a significant revenue contributor in the long run.

Pandora also bought Rdio for $75 million just before shutting it down and salvaging its intellectual property. The aim was to use Rdio’s resources to make certain fruitful changes to Pandora’s listening platform. The planned launch of on-demand music is in-line with this acquisition and it may help the company grow its subscription business relative to its advertising business, that in-turn can have a mitigating impact on Pandora’s losses. However, to make this work, the company would have to bolster its music library which would again need significant investments in content. Nevertheless, these investments would make more sense than royalty rates paid for ad-supported free music.

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