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Shares of Pandora Media (NYSE: P ) jumped more than 10% in early January. The company signed a plethora of mostly car-related equipment deals and a terrific update of subscriber numbers. Not only did the Internet-radio maven look like a credible threat to the Sirius XM (Nasdaq: SIRI ) near-monopoly on premium car entertainment (it currently holds well above 50% of the overall premium car radio market share), but the service was even stealing market share from FM radio.
Today, all of that is forgotten. Pandora plunged as much as 27% overnight. The fourth-quarter report revealed that Pandora's subscriber base is growing very nicely indeed -- but the company forgot to monetize that growth.
Listener hours in the fourth quarter doubled year over year, but revenue grew at a slower 71% pace. There's a big disconnect between those numbers that shows advertisers slipping through the company's fingers. Meanwhile, rising costs didn't take a courtesy break, and the bottom line showed a non-GAAP loss of $0.03 per share.
In Pandora's defense, that's roughly where management guidance pointed investors. But they're generally in the habit of pointing investors at low and reachable targets that are easy to bowl down with authority. That didn't happen this time.
And I'm not sure the company will ever get back to that old habit. The business model looks broken and is only getting worse.
Pandora keeps reporting tremendous subscriber growth, but ad revenues aren't following suit. That's not a sustainable situation.
See, it's not good enough to just add more listeners and hope for a miracle here. Pandora pays a large and rising amount of license fees per song streaming into listeners' ears, so new listeners don't translate into easy money. Unless Pandora finds a way to juice the ad revenue per song (or, less likely, make a sustainable revenue platform out of paying customers), more listeners may actually translate into bigger losses.
Compare this with the streaming media model of Netflix (Nasdaq: NFLX ) . The company pays fixed license fees for the right to stream movies with very little overhead per movie served or customer added. In this model, adding tons of new viewers is the very lifeblood of the business. Once Netflix matches its long-since-immovable licensing costs with the breakeven number of paying customers, every new set of eyeballs becomes nearly pure profit.
Netflix and Sirius would love growth rates like Pandora's, but Pandora would kill for those companies' paying subscription revenues. The ad-based model is breaking down like it's 2001 all over again. Serious investors should leave this outdated business model behind and take a look at The Motley Fool's Top Stock for 2012 instead.