Pandora Media Inc (NYSE:P) investors were singing a sad song last week. Shares of the online jukebox got shellacked, falling 35% on Friday after the company's third-quarter earnings report came out.
Pandora is no stranger to sharp sell-offs as the stock has always been volatile since its 2011 IPO, but something was different this time. Although revenue was up 30% as the company continues to monetize its airplay through advertising income, listening hours, which are its most important metric, increased just 3% year-over-year, and were down 3% from the quarter before. In the second quarter, listener hours were up just 5% year-over-year.
In other words, listenership appears seems to be plateauing, and the possibility of listener hours falling while the company is still unprofitable and building out its ad base would be devastating for the stock. Active listeners, meanwhile, were up just 2% year-over-year, to 78.1 million, and down 2% sequentially.
It's no secret who the culprit is. Apple Inc (NASDAQ: AAPL) seems to have finally landed a solid blow with the launch of Apple Music. The Spotify-like service has garnered 6.5 million sign-ups thus far, and many other sampled the platform with its three-month free trial period. Considering the three-month trial period began in June 30, Pandora's performance may improve in the fourth quarter as the free trials subside. But Apple Music's launch underscores the shift in the competitive landscape that is Pandora's biggest threat today.
On the recent earnings call, Pandora CEO Brian McAndrews downplayed the impact of Apple Music, saying it was similar to when Apple launched iTunes Radio in 2013, an event that was little more than a temporary setback for Pandora. Still, there are a number of signs that Pandora is losing mindshare in the streaming market.
According the website KWFinder.com, Google searches for "Pandora" peaked in December 2011, and for "Pandora Radio" in 2009. Searches for "Spotify", meanwhile, have been growing steadily since 2009. Searches for "Pandora" still outnumber those for "Spotify," 16.6 million to 11.1 million, but the trend clearly favors Spotify. Spotify is now valued at $8.5 billion, compared to just $2.6 billion for Pandora, and looks poised to surpass its total listenership by the end of the year.
Begun as the Music Genome Project, Pandora was the original Internet radio provider, and still is -- but its failure to jump into the on-demand market that's now carrying growth in streaming may be its most glaring mistake. Still, there are others.
Unlike Spotify or Apple Music, Pandora has failed to establish a foothold abroad. Spotify is now available in over 50 countries, and Apple Music is offered around the world, but Pandora is only streaming in the U.S., Australia, and New Zealand. While Europeans were clamoring for the service a few years back, negotiating deals over music rights in individual countries has proven too hairy for the company.
Successful penetration of the European market could have led to double the total number of listeners by now, dramatically changing the company's financial picture. Licensing regulations forced Pandora to shut off foreign listeners in 2007, and despite promises to renegotiate those deals, the streaming service never came back.
Legal woes have also been a constant throughout the company's history. Pandora recently agreed to pay $90 million for use of songs released before 1972, and steep royalty rates have hampered any profits. For years, the company has argued that it's unfair for it to pay higher rates than both terrestrial radio and satellite radio provider Sirius XM, but to little avail.
Pandora has consistently paid about 50% of its revenue in royalties, the biggest reason for its lack of significant profits. Even Spotify, which brings in much more revenue than Pandora thanks to its streaming model, is still operating at a loss, a sign that the economics of the streaming music business may not work for anyone. Apple can afford to operate its music service at a loss if it wants to since the main purpose of it is to add value to Apple's ecosystem so it can sell more devices.
What's left in Pandora's box
While the strong ad revenue growth is a promising sign, it won't be sustainable if listener hours start to slide. CFO Mike Herring said on the call that advertising revenue operations are already going at full strength, a sign that revenue growth will be limited without additional listeners.
The most intriguing weapon in Pandora's box is its recent acquisition of Ticketfly. The music-streaming service picked up the ticket-selling site for $450 million, a move that could be the best use of Pandora's trove of user data and its connection to nearly 80 million listeners. While recorded music sales have plummeted since 2000, music festivals have exploded, making ticket sales the most appealing business opportunity in the industry today.
CEO Brian McAndrews called the acquisition a game-changer for Pandora, and noted that 40% of mid-market concert tickets go unsold, primarily due to lack of awareness. The combination would solve the problem of event discovery, he said.
However, with Spotify's user base doubling in the last year and Apple Music now on the hunt, Pandora's cache of listeners now look more vulnerable than ever. Even with the Ticketfly, its listener base remains the key to its success. If those numbers decline again, expect another landslide in Pandora shares.