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Investment Overview for Pandora (NYSE:P)
- Launch of Pandora Premium
Pandora has jumped into on demand music streaming with 'Pandora Premium.' The company will charge $10 monthly for its subscription which is similar to what Apple Music and Spotify charge for this service. This step is likely to attract more subscribers for Pandora given the fact that the company is trying to shift its focus from advertising to a subscription based model. However, Pandora's music library of 1 million is far smaller than Apple Music's and Spotify's 30 million. Therefore, the company has to focus on increasing its library before it can attract customers to pay a similar price as to what they are paying to its competitors.
- Acquisition of Ticketfly
In 2015, the Internet radio provider made its way into the ticketing business with the acquisition of Ticketfly for $450 million in a cash and stock deal. Subsequently, Pandora added a new division to its reporting structure - Ticketing Service, which accounts for less than 3% of its value as per our estimate. The ticketing service business was operational for a couple of months last year and will report its full yearly revenues for the first time at the end of 2016.
- New Royalty Rates
The verdict for new royalty rates for Pandora by the Copyright Royalty Board went the Internet radio provider's way as the CRB set Pandora's royalty rates at $0.0017 per performance (ad-supported) effective 2016, up slightly from the $0.0014 that the company was paying in 2015. As per the earlier CRB guidelines, the Internet radio company was increasing its royalty rates by $0.0001 every year and the latest verdict reflects an increase of just $0.0003, while many expected it to be much higher, thanks to SoundExchange's proposal of $0.0025. Also, the increase beyond 2016 through to 2020 will be based on the consumer price index, and we believe that Pandora should be extremely pleased with how things have turned out, because the situation could have been a lot worse.
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 be 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 and we expect this figure to reach 94 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 89 million by end of our forecast period, there could be downside of about 5% 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 has managed to negotiate the royalty rate somewhat its way and is trying hard to get direct licensing deals for better rate certainty. However, if the company still fails to effectively monetize its platform and grow revenues faster than expenses, failing to bring down content costs as a percentage of revenues below 53%, there can be about 20% downside to our 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 82 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 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 is 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 21.1 billion hours of music in 2015, registering a growth of more than 5% 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 1.4 billion for 2015, reflecting an increase of over 20% as compared to the previous year. IDC forecasts smartphone shipments to grow to 1.9 billion by 2018. Given that 80% of Pandora's listening is happening on the 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 over 9% of the market.
The radio ad industry, which stands tall at $17.6 billion (2015), 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 reason 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 the automobile segment, it will face a challenge from Sirius XM.
Spotify is another strong player which has been growing strongly in the U.S. market. As of January 2016, Spotify had 100 million active users, up from 40 million in mid 2014, and 30 million of those were paying subscribers. In December 2013, 27% of the total Internet users in the U.S. were using Pandora, while the figure for Spotify was at 6%. At the end of 2014, around 51% of Internet users were listening to music on Pandora and 14% were using Spotify. Although both the players have improved since then, Pandora is likely to reach a saturation point soon, but Spotify still has a lot of 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. The CRB revised Pandora's rate at the end of 2015 for 2016 and beyond, and the increase was faster than it was before.
Year Rates per Performance
Acquisition of Ticketfly
In 2015, 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. Ticketfly, a competitor to Ticketmaster, is expected to assist Pandora 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 currently object to the platform due to its ‘unacceptable’ royalty payouts.
Acquisition of Rdio
Towards the end of 2015, Pandora announced that it plans to acquire Rdio’s assets for $75 million. 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, the listening experience on Pandora’s platform will improve, which can provide some incentives to free users to pay for the services. New on-demand features and a social media component can make Pandora’s platform a little similar to Spotify, where users are more inclined to buy subscriptions.
Direct licensing deals for better rate certainty
In 2015, Pandora signed three separate multi-year licensing agreements with Sony/ATV (world's largest music publisher), ASCAP and BMI, (some of the biggest performance rights organizations (PROs) in the world). For Pandora, direct deals such as the ones mentioned above help in improving its offerings portfolio, which is the prerequisite for garnering listener attention. With a higher number of users, the company should be able to attract more advertisers and even propel its subscriber growth by leveraging improved features of its platform (Rdio’s acquisition) and a bigger music library. Spotify already has a huge music library of over 1.5 billion songs and it adds almost 20,000 songs daily. Due to this and its social media component, Spotify is doing a much better job of converting free users to subscribers. Over 25% of Spotify’s users are subscribers while the figure is around 5% for Pandora. Hence, by enhancing its music offerings, Pandora may be aiming to improve the proportion of subscribers in its user base, which can help it expand operating margins and ultimately generate profits. The company is reportedly approaching others with similar deals as well.
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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