The Future of Internet Radio Won't Come Cheap

Pandora Media (NYSE: P  ) is growing, but not just in terms of revenue and listenership.

Morgan Stanley analyst Scott Devitt is downgrading the music-discovery website operator this morning -- from "overweight" to "equal weight" -- on the fear of a near-term escalation of costs.

Pandora has grown to the point where it can begin targeting local radio ads, and ramping up that sales team won't come cheap. Devitt now doesn't see the company returning to positive EBITDA until 2015, a year later than Wall Street's consensus estimate.

The shift to local advertising is naturally in the company's best long-term interests. Right now, Pandora is primarily leaning on mobile advertising speedster Millennial Media (NYSE: MM  ) to monetize its booming smartphone usage. There is a premium ad-free subscription that's available, but most of the service's users are freeloaders that put up with the ads for the sake of free tunes.

Now, there's nothing inherently wrong with Millennial Media. The stock soared 46% last week after reporting an encouraging quarterly report. CEO Paul Palmieri stunned CNBC viewers by claiming that the click-through rate on mobile ads is actually higher than conventional online ads.

However, Pandora knows that the real money lies in taking a page out of the terrestrial radio playbook and reaching listeners with the local ads that will be both more relevant to the user and more lucrative to the streaming service.

Pandora served up 1.12 billion hours of music to its 54.9 million active users last month, a 76% increase from the tunes dished out last July. Pandora's share of the total U.S. radio listening market is now up to 6.1%. It has reached the critical mass where it doesn't need to serve up ads for national apps or artist releases. Pandora's ready to get local, and the shift to a demand-side ad platform will result in near-term pain for the sake of long-term gain.

Everyone is trying to emulate Pandora's success. Even terrestrial radio giant Clear Channel (OTC: CCMO) and satellite radio monopoly Sirius XM Radio (Nasdaq: SIRI  ) have been beefing up their streaming offerings to cash in on Pandora's popularity growth.

Fortunately for Clear Channel and Sirius XM, they won't have the same challenges that Pandora is experiencing. Clear Channel's iHeartRadio is a streaming sensation. Millions of users can check out hundreds of Clear Channel FM and AM offerings, but the media giant already has the local sales teams in place. Sirius XM is a premium service where folks are already paying for commercial-free music.

However, Pandora and other online streaming upstarts will ultimately get to the point where the costly push to go local won't come cheap. Pandora's getting there now. Investors should be rewarded in the long term, but things will get rocky along the way.

Stream on
The next trillion-dollar revolution will be in mobile, but the best investing play isn't necessarily Pandora. If you want to cash in on the upcoming trend, a new report will get you up to speed. Yes, it's as free as this article, but it won't last forever, so check it out now.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Millennial Media. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 14, 2012, at 2:13 AM, DR1P wrote:

    "Everyone is trying to emulate Pandora's success." WOW, talk about a stretch! OK, I'm sure you didn't intend it to sound that way, but it comes across as though Pandora is the great American success story in this industry and that everyone wishes that they could be just like Pandora.

    I could agree with you if you hadn't made that sentence sound so all encompassing and had specified that the other companies are only trying to emulate Pandora's growth of popularity or "active users"... IN THAT SENTENCE. Then again, exactly what constitutes an "active user"?

    Personally, I would say that Pandora would be lucky to emulate Sirius XM's success, considering that Sirius XM is not only making a profit, but has been steadily increasing their profit for a while. This is in stark contrast to Pandora who has been steadily losing money and, as you stated, was downgraded..."on the fear of a near-term escalation of costs". Then there are also the other challenges, that you did mention, which Pandora has that the others don't.

    If I owned a company in the radio broadcasting industry, I would want it to be more like Sirius XM than Pandora. Oh that's right, I do own part of Sirius XM.

Add your comment.

DocumentId: 1982673, ~/Articles/ArticleHandler.aspx, 4/18/2014 8:24:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement