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What's Next For Apple and Pandora?

9-9-2012

There's no arguing Pandora is a popular music service loved by many consumers. Pandora says it has 55 million active users. The company also says it now has 6 percent of all audio (radio) listening, although there is no real way to verify that number. Pandora also consistently reports higher quarterly listening numbers (even though Triton reports a summer decline in Pandora, and all, radio listening). There's no question advertisers are using the service. Pandora reported $101 million in revenue during the most recent quarter, $53.2 million from mobile alone. So with such a popular and successful service, why did just a whiff of news from Apple send the Pandora stock tumbling?

When The Wall Street Journal broke the news late Thursday that Apple was considering a Pandora-like music service, every news organization picked up on it as if it were an international incident. Pandora may have 54 million users, but Apple has more than 400 million iTunes accounts. And, by the way, it's Apple. THE Apple. That type of coverage proved both how popular Pandora is but also how vulnerable it can be to a major competitor like Apple. Friday turned out to be a bad day on Wall Street for the stock, despite an overall up market. On high volume, the Pandora stock dropped nearly 17 percent to close at $10.47. It dipped as low as $9.95 on Friday. 24 million shares of Pandora were traded on Friday. An average day sees 3.7 million shares traded.

That drastic drop in the stock price is proof how quickly things can change on Wall Street. One day they love you, the next day they hate you. It was less than two weeks ago, the Pandora stock jumped 14 percent after the company reported its big quarterly revenue gains, especially in the mobile space, even though Pandora lost over $5 million in the quarter. 

Another angle to keep an eye on is the automotive space. What didn't get a lot of press last week was what PC Magazine reported: "Auto manufacturers like American Honda are allegedly remaining service-neutral and, worse for Pandora, are allegedly chatting with Apple to see just how the company might fit into the auto-audio mix going forward. "If the Apple rumor is true and auto manufacturers are waiting to see what Apple has to offer, that could have big consequences.

For the current Pandora business model to turn profitable it must continue to make gains on the advertising side. Gains it continues to tell anyone who will listen, are coming, and will continue to come from traditional radio. Kennedy aggressively touts how Pandora has disrupted the traditional radio model and cut into radio's $16 billion advertising pie. Kennedy says his sales plan is being slowly rolled out across the country, beginning with major markets. Perhaps a little too methodically for investors. During the quarterly earnings call, one analyst questioned whether Pandora was spending enough on hiring salespeople to generate more revenue. To generate revenue fast enough. Pandora has increased its total employee head count from 427 last year to 589 this year. CEO Kennedy says a majority of that expense came from building out the sales team #$23.5 million#.

Things could drastically change for the better for Pandora if they ever get any relief from the enormous fees it has to pay for content. And it's been lobbying Congress to change the model which cost the company 60 percent of its revenue to pay for during the last quarter. If Pandora gets a break on those fees at some point, even a small break, it could turn it into a profitable company. The more successful Pandora becomes, under the current model, the higher its cost will grow. As listening increases, so do the costs for content. And, this current model is in place until 2015.

Pandora executives have not said anything publicly about the Apple rumor. Perhaps we'll hear what they think later this week. A Pandora Vice President will speak at the Bank of America Merrill Lynch 2012 Media, Communications & Entertainment Conference, Wednesday at 4:45 p.m. Eastern. And, CEO Jospeh Kennedy will speak Thursday in Las Vegas at the Deutsche Bank's 2012 dbAccess Technology Conference. All eyes will be on the stock today.



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