2 Reasons to be a Pandora Media, Inc. Bear

Internet radio company Pandora  (NYSE: P  )  has seen a slight recovery in its stock price over the past few months. However, the company still faces a couple of big challenges. The company's royalty payments are rising, and as a result Pandora has found it harder to post consistent profits. On the other hand, competition is greatly increasing. These two factors could produce major headwinds for Pandora.

Rate increases
Pandora's rocky business model greatly depends on the fees that it pays to artists. The company continues to see its payments to musicians and artists rise, and as a result it has been harder for the company to report positive net income consistently.

In the first quarter of 2014, Pandora's content acquisition cost stood at 56% of revenue and that will likely increase in the future. Pandora hiked the price of its Pandora One service from $3.99/month to $4.99/month because of the higher royalty fees it expects to pay. Pandora's royalty fees paid to performers for subscription listening have risen 53% in the last five years and will increase another 9% in 2015. The complained explained this is why it raised the price of Pandora One. 

As a result, the company will likely see its content acquisition costs rise in 2015. In addition, as the average consumer has an extensive choice among music listening sources, the customer might be reluctant to pay for a Pandora One subscription.

Pandora must also pay roughly 4% of its total revenue to performing rights organizations such as BMI and SESAC. And its payments to performing rights organizations might also increase if the company sees more lawsuits in the future. 

Rising competition
Pandora's competition in the Internet radio category remains on the rise. Even though Pandora is the leader with 77 million active listeners and more than 250 million registered users, a big surge in competition has occurred in the space. 

Pandora's leading competitors in the space, Spotify, iHeart Radio, Apple  (NASDAQ: AAPL  )  and Google  (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) , are all pushing hard to grow their presences in online music services. eMarketer expects U.S. advertisers to increase their spend for online and mobile radio services to $2.04 billion in 2014, a 23% year-over-year increase, and that is likely a major reason why new players have entered the field. In addition, all of the players -- including Pandora -- also offer ad-free paid subscriptions to their users. 

Apple acquired Dr. Dre's Beats and will market it to its global customer base, so it will see an increase in paid subscribers for Beats Music in the future. As a result, Apple will become a much stronger force in the space with Beats Music to supplement iTunes Radio, the ad-supported offering from Apple.

Google, on the other hand, already has the largest music streaming platform in the world with YouTube. Google also offers its Music All-Access service on a paid subscription basis for a fee of $9.99/month. In addition, Google recently acquired Songza, which is a music streaming service that curates music according to users' customized tastes. Since Google has substantial consumer reach with Search and Android, the company can roll out Songza to hundreds of millions of Android devices. In the process, it could see robust consumer adoption of Songza. 

Competition for your car
Last quarter, Pandora stated that it had 5 million listeners in autos. But the company faces extensive competition on that front as well from AM/FM radio, which has more than 200 million weekly listeners, and satellite radio giant Sirius XM, which offers lots of non-music content for its subscriber base of almost 26 million. As a result, Pandora faces competition from various angles and might have a harder time growing its active user base and revenue substantially in the future. 

The takeaway
Pandora is the category leader in the Internet music space, but extensive competition and rising content rates are hampering its moat. The company has to significantly ramp up its monetization per listener hour to stabilize its profit margin, which has been very lumpy. And the growing competition in the space will make it harder for it to increase its total listener count and poses serious challenges to the company.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | 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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3015455, ~/Articles/ArticleHandler.aspx, 8/27/2014 3:29:11 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