Pandora Wants What Netflix and Sirius Already Have

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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.

Fool contributor Anders Bylund owns shares of Netflix but holds no other position in any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.

Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On March 08, 2012, at 9:08 AM, southernbeachguy wrote:

    The only reason that Pandora has great growth rates is because it is free. Curiosity get people to look at the service. After they try it a couple time Pandora is stuck with people's profiles in their computer taking up disk space. If you use it in your car you will run up your Bandwidth allowance in less than a week. If you want to use it more, then it will require a separate Internet agreement that will cost $40-$60 per month. Most people will stay with Sirus that has better Content for a measely $15 per month. I have had 2 Sirus Subscriptions in 2 cars for 9 years and am extremely please with what I get for the money.

  • Report this Comment On March 08, 2012, at 9:41 AM, amanisofia wrote:

    Pandora is the future of internet and terrestrial radio. I too once had sirius/xm in my cars. I only listened to one or two stations and was paying $15 a month (all accounts have been canceled). Now all I use is Pandora. It is the way pandora picks your music that is its genius. The average commute is 30 minutes so you never really hear a commercial or repetitive songs. No you will not use up you allowed bandwith, unless you are a cross country trucker. No you will not need a separate internet agreement. Also the article failed to mention that pandora is available on most internet enabled TV devices.

    Pandora is the future and its day is almost here. At about 10.80 yesterday it was a deal.

  • Report this Comment On March 08, 2012, at 11:47 AM, Cool700 wrote:

    SIRIUS XM has much better internet radio. I love that I don't have to fumble around every time with a phone to hear music. I push a button and get what I want! If you are in a hurry fumbling with a cell phone would make you late.

    I also travel to visit family across states and I am not a truck driver. I love being entertained the entire trip with no commercials!

  • Report this Comment On March 08, 2012, at 4:28 PM, my2cents4u wrote:

    Pandora's corporate slogan should be: "You get what you pay for". Why the internet pundits continue to shill for a non-profitable idea reminds me of the tech bubble that popped in 2001.

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