Is a Buyout the Last Hope for Pandora Media Investors?

A full transcript follows the video.

Chris Hill: Pandora's first quarter loss was smaller than expected, but unlike Wayfair, revenue fell short of expectations, and the stock down about 8% this morning. We were talking before we started taping with our producer Dan Boyd. This is kind of like Coach and Kate Spade, the brand is stronger than the business. I feel like that's a little bit what's going on with Pandora. I like Pandora. Dan was talking about, "I listen to Pandora a lot." So do I. I use it a lot. The business part, they're struggling with, and I'm wondering if they are starting to put themselves in a position for sale.

Jason Moser: As a listener of Pandora, do you pay for subscription?

Hill: No, I do the ad-supported model.

Moser: OK. Deezy, do you pay for a subscription? No, OK.

Hill: He's shaking his head no.

Moser: OK. There's the problem right there. I think that is it in a nutshell for them. And I'm sure there probably is a suitor out there who could make Pandora bit more of an attractive business. I think this is a testament to, No. 1, I think they dragged their heels a little bit. I just don't think they really thought the competition in this space would ramp up so quickly. Also, the economics of this business, of this market, are really difficult. There aren't many musicians out there today who are going to sit there and tell you how profitable being a musician is, who are like, "You have to be a musician because when you put out a record or a song, it's a never ending spigot of money that keeps on flowing." It doesn't work that way anymore. Really, if you want to be a successful musician, you have to figure out a way to tour for a living. And I think that's one of the concerns, that you have musicians wanting more, and you have businesses that can only pay so much, because they can only bring in so many subscribers, or that ad-based model is only going to let them spend so much on the content. When you look at Pandora -- I agree with you that the brand is still somewhat strong. I think it's something that's recognizable. 

But when you look at the financials of this business, ever since these guys went public, they've never been profitable, they've never been cash flow positive. And there's a reason for that. One time, it was a neat offering because of the advent of streaming music. But then you had Amazon, you had Apple, you had Spotify. And really, I'm looking at Apple and Amazon here as two of the big competitors out there, and the reason why they're so formidable is that they are not just in the business of streaming music. The streaming music is essentially complementary to everything else that they offer. And I think that makes Pandora's business really difficult to sustain on any meaningful level. Now, to that end, sure, I bet you there's probably a bigger player out there that could buy Pandora, figure out a way to make it a bit of a better offering as we see internet music continue to take the direction it's taking. I've heard before of rumors out there that perhaps Sirius XM would be interested in acquiring Pandora for some reason. So who knows? But I think when you look at the economics of the business, and you look at the history that Pandora has, it only gets tougher for them. And if over the past five years, they've not been able to make it work, I can't fathom a solution that helps them make it work going forward, other than an acquisition. I mean, I wouldn't buy shares based on that thesis. So, I think they're really stuck between a rock and a hard place.

Hill: I'm wondering who's making the case for Sirius XM buying Pandora.

Moser: I don't know. 

Hill: Sirius XM seems like they're covered, both in terms of music and business model. Unless the price is so amazing ... Sirius XM is, what, a $22 billion company, something like that? It's roughly 10 times the size of Pandora.

Moser: Yeah, somewhere in the neighborhood of 30 to 32 million subscribers. Now, I think a lot of those subscribers came on for Howard Stern. I could certainly relate to that. But I do think that, Stern's contract, I think he has 3.5 more years on his current contract. Once that ends, I think the going wisdom is he's going to hang it up and do something else with his life. But they'll continue to have access to his content for an additional seven years beyond that. Perhaps they would see something in owning that Pandora brand. Again, as we've seen in retail, some consolidation in the sector makes it a little easier. Perhaps consolidation there. At this point, I'm sure they could buy Pandora for a song. No pun intended.

Hill: [laughs] We're going to wrap up now. I've said this the other people, I expect that from Simon Erickson, I don't expect that from you.

Moser: Well, I said no pun intended. It's kind of like Ricky Bobby, "I said with all due respect!"