1 More Reason to Sell Pandora

Life doesn't get any easier for Pandora (NYSE: P  ) .

Shares of the leading music streaming service traded as much as 7% lower this morning, after striking a royalty deal with Sony/ATV -- a joint-venture between Sony (NYSE: SNE  ) and the estate of Michael Jackson -- that will boost the amount that Pandora's paying in publisher royalties by 25%.

Ouch!

Now, these publisher and songwriter royalties aren't as high as the music royalty fees that Pandora's paying to the major labels and artists. However, after championing the Internet Radio Fairness Act last year with its goal to pay less than the fractional pennies that it has to pay for every stream, the last thing that investors want to see connected with the company is a larger royalties tab.

Investors already have plenty of things to worry about when it comes to Pandora.

  • Despite posting healthy year-over-year growth, revenue is starting to stall sequentially. Pandora's stock took a hit last month, after guidance calling for $120 million to $123 million in revenue for the holiday quarter, essentially flat with the $120 million it reported during its fiscal third quarter.
  • The threat of Apple (NASDAQ: AAPL  ) entering the market may or may not be real, but Sirius XM Radio (NASDAQ: SIRI  ) is definitely coming. The satellite radio giant was supposed to roll out its rival streaming platform late last year. Apple hasn't gone public with its intentions, but there are too many reports of Apple negotiating with the major labels for licensing rights to ignore this inevitable entry. Pandora's popularity as an ad-supported free platform will continue to thrive after Apple and Sirius XM arrive, but it will be harder to get noticed in the premium category, where Pandora needs to beef up its presence if it wants to be consistently profitable.
  • Arguing about how to split a penny for royalties wouldn't be a big deal for a premium service along the lines of Sirius XM, but Pandora's still largely a freeloader magnet. Just $13.7 million -- or 11% -- of Pandora's $120 million in revenue during its latest quarter came from subscriptions.

Pandora's popularity is unquestioned. It emerged from this month's CES exposition with a ton of new deals for integration in cars and consumer electronics. It closed out December with 67.1 million active listeners, 41% ahead of where it was a year earlier. However, Pandora's ability to turn its market dominance into a profitable business -- something that will ultimately dictate Pandora's value as an investment -- continues to be challenged.

Stream on
Pandora has won millions of devotees among music fans, but few supporters on Wall Street. The online jukebox has put up dramatic growth numbers in its listenership, and seems to be redefining the way we consume music, a transformation that's only likely to grow. But high royalty rates, and competition from all corners, threatens to silence this upstart before it ever grabs the microphone. Can Pandora translate success with its listeners into a prosperous business model that will deliver for investors? Learn about the key opportunities and potential pitfalls facing the upstart radio streamer in The Motley Fool's new premium research report. Not only will you get the kind of insight normally found from high-priced Wall Street brokerages, but you'll also receive a year's worth of free updates. All you have to do is click here now to activate your subscription to this invaluable investor's resource.


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