In today's world of mobile advertising, being the most popular just doesn't cut it like it used to.
A Bloomberg report from yesterday is shedding some dim light on Pandora Media's
Competitors are storming the music streaming business. Rivals include Europe's Spotify, which made a big splash when it crossed the Atlantic, as well as music-based social networker Last.fm, which was bought by CBS
Pandora and Spotify are both also trying to hitch a ride home with you. Pandora hooked up with Toyota
Pandora's first earnings release as a public company mostly went well in terms of revenue growth, which jumped 117%. The problem I've always had is that content acquisition costs – the company's largest cost component -- continue to grow faster than revenue, rising 130% last quarter. Additionally, income from operations shrank by 42% despite the revenue gains.
The mobile market is evolving so quickly that it will take time to monetize the trend. According to research firm IDC, mobile ad spending is set to reach $10.5 billion in 2015, compared to overall ad sales of $328.6 billion. One reason that Pandora's ad growth has been sluggish is that the company has struggled to grow its sales force as quickly as its user growth.
As much as I love using the service, I hate the idea of investing in Pandora. I have no problem with companies being unprofitable in the early years, but there has to be hope that the company can overcome the money-losing hump eventually. In this Fool's opinion, even if Pandora does start putting up black ink, content acquisition costs will keep net margins razor-thin and the risks outweigh the potential rewards.
Add Pandora to your Watchlist to see if it ever becomes profitable.