In this clip from Industry Focus: Tech, Motley Fool analysts Dylan Lewis and David Kretzmann take a look at Pandora's less-than-spectacular 10-year run in the streaming business, how its competition became so incredibly difficult to face off against, and why it's going to be so hard for Pandora to recover its edge.
A full transcript follows the video.
This podcast was recorded on Dec. 9, 2016.
David Kretzmann: Pandora is in an interesting position, looking over the past 10 years or so of financials that are available for Pandora. This is a company that has never been profitable, it has never produced positive free cash flow. So, when I see that...they lost $270 million over the past year, and they burned over $300 million in cash, you're probably not in a position where you can be overly picky when you're trying to find suitors to potentially acquire you. So, I think Pandora needs this more than Sirius or Liberty or whoever, Apple or Amazon or whoever they think might want to acquire them. I look at this and I don't think Pandora has a whole lot of negotiating leverage at this table.
Dylan Lewis: And I think the further and further out we get, if you had talked about Pandora as a business two years ago and what they offer versus on-demand streaming, you'd say, "Yeah, I think the two can co-exist." I was a firm believer in that, because of the passive listening, the music recommendation side of Pandora, seemed strong enough to protect them from people who just wanted to listen to the music they wanted to listen to at that time. Spotify has done a really good job with their curated playlists, and their offering is a lot more compelling now because you can get that curated feel, and listen to the new Bon Iver album that you just want to plow right through.
Kretzmann: You can listen to anything, anytime. And that's a really compelling value proposition for consumers. Spotify now has 40 million subscribers to that service. Apple Music, which just launched last year, has 20 million subscribers already. Those are the big players. Amazon just came out with a service for Prime members that's $8 a month, or $4 a month if you're just listening through your Amazon Echo device. YouTube Music is also getting off the ground a little bit. And Pandora still hasn't come out with an on-demand streaming service. Supposedly, it's going to come out later this year. But the company is still very dependent on that free, ad-based model. They do have about 80 million active listeners, people who listen every month or so. But Pandora has just been very slow adapting to what is a very clearly shifting landscape with music streaming.
Lewis: Yeah, they've let competition pass them by in a way that's kind of surprising because they were really the first player out here doing this, and making music available in this way as a mainstream service. The tough thing for them is, even when they roll out this on-demand streaming option, it's going to be an uphill battle because they're competing against people that have commoditized music in a lot of ways, right?
Kretzmann: Yeah, it's hard to differentiate yourself with music now. Are you going to be able to listen to songs that you can't get on Apple Music or Spotify or Amazon? I don't know, that's a tough thing to do. Maybe you see some of these companies start doing what Netflix is doing with original content with TV and movies. Maybe something like that happens. But it's hard if you're not already part of an established ecosystem like Apple and Amazon. Those are great examples where the music just fits into an ecosystem that they already have with the App Store or Amazon Prime. Pandora doesn't really have that. So, it's going to be an uphill battle, like you said, to acquire customers from people who are already used to streaming through Spotify, Amazon, Apple, or a lot of the other solutions already out there.
Lewis: And those big businesses don't need music to be meaningful for them financially. If anything, it can be a loss leader for them, if it makes their core offering that much stronger. If you're a stand-alone business trying to make it work on your own, it's a lot tougher.
Kretzmann: Yeah. I look at that, and music streaming is really becoming more of a commodity type of business, which you wouldn't have really anticipated five years ago. But Amazon is already upping the ante, saying, "We'll charge $8 a month." And I think, inevitably, you're just going to keep seeing that price ticking down. It will be an increasing challenge for companies to offer something that's different from the other competing options out there. So, I think consolidation is inevitable at this point. But I don't know if Pandora is really all that attractive of a target, if a company is trying to amp up their offerings.
David Kretzmann owns shares of Amazon.com, Netflix, and Sirius XM Radio. Dylan Lewis owns shares of Apple and Pandora Media. The Motley Fool owns shares of and recommends Amazon.com, Apple, Netflix, and Pandora Media. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.