Digital music services are a dime a dozen nowadays. But when the grandaddy of them all sets up for a quarterly update, music lovers and investors alike are wise to prick up their ears.

That's the case this week. Online music service Pandora (NYSE: P) reports second-quarter results after Wednesday's closing bell. Share prices spiked briefly on strong first-quarter results three months ago, but the joy didn't last. The stock has traded largely sideways ever since, but the chart is choppy enough to give me motion sickness.

Will this report soothe shareholders' tense nerves like a sweet lullaby, or stir up more trouble like an angry punk anthem?

Word on the Street
Analysts are looking for $101 million in revenue, which would be a stunning 51% jump year over year. But operating costs will eat all of that growth and more besides; the Street consensus calls for a net loss of $0.03 per share, down from a $0.02 adjusted profit per share a year ago.

Mind you, the analysts rarely nail Pandora's bottom line. The company has either crushed earnings estimates or missed by a country mile in each of the last four quarters, which covers Pandora's entire existence as a public company. For what it's worth, the analyst targets sit at the top end of management's guidance ranges.

One Fool's point of view
I expect another show of strong revenue and subscriber counts, but that's not necessarily a good thing. As CFO Steve Cakebread noted in the previous report, "We expect negative cash flow from operations resulting primarily from increased listener hours and resulting content spend." The more users Pandora gets, and the more they take advantage of the music service, the deeper Pandora's cash flows sink into the red.

That's a direct result of the high and rising royalty rates Pandora pays out per streamed song, coupled with difficulties on the monetization side of the equation. A more traditional broadcaster such as Sirius XM Radio (Nasdaq: SIRI) makes more money with more subscribers because they're all locked up in revenue-generating contracts. Heck, even the decidedly nontraditional Netflix (Nasdaq: NFLX) model is built on the assumption that more users create bigger cash flows.

But Pandora's business isn't built around its meager subscription sales. It depends on strong ad contracts, and they're just not there yet.

President and CEO Joe Kennedy and team need to prove that ad sales are getting traction. I'll look for discussion of political campaign-related sales in this report, as well as any discussion of the Olympics. These are the type of events that can make or break a marketing service, so the successes or failures here will give us strong clues about Pandora's ability to execute.

Buy, sell, or hold?
For now, I'm in a "show me" mode on this stock. My bearish CAPScall on Pandora is unmoved by this upcoming report, though the actual news might change my mind.

The Fool has created premium in-depth reports on both Netflix and Sirius XM. Sign up for both if you want to get a strong handle on the new era in consumer media. Each report comes with a year of free updates. Click here to get started with our Netflix report, and here for the Sirius analysis. Pandora doesn't have a premium service to its name yet, but you can always add the stock to your Foolish watchlist to get easy access to our daily coverage.

Fool contributor Anders Bylund owns shares in Netflix and has created a bull call spread on top of those shares, but he holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix. Motley Fool newsletter services have recommended buying shares of Netflix. The Foolish disclosure policy is listening to The White Stripes' "Stop Breaking Down" right now. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.