Please ensure Javascript is enabled for purposes of website accessibility

What If Pandora Has a Better Model Than Spotify and Apple Music?

By Rick Munarriz - May 24, 2016 at 1:10PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Apple and Spotify are growing faster than Pandora in the realm of music streaming, but they may not be the ultimate winners.

This seems to be an unsettling time for Pandora Media (P). User growth has stalled, and now even its largest outside investor is calling for the streaming music pioneer to put itself up on the bidding block.

However, we can't assume that the grass is greener on the other side. Pandora's biggest rival -- Spotify -- is struggling to turn a profit, and that's the model that many of the tech giants including Apple (AAPL -1.36%) are championing. 

Spotify's parent company posted fresh financials yesterday, detailing its fiscal performance for 2015. It was another year of heady growth. Revenue soared 81% for all of last year, well ahead of Pandora's 26% increase. It's clear that Spotify is the speedster here, and the market generally celebrates its model that relies largely on premium subscriptions to generate revenue. Most of Pandora's users are freeloaders, taking advantage of the platform for free in exchange for putting up with a steady flow of ads.

Spotify offers a free platform with limited features and occasional ads, but 89% of its revenue last year was generated from subscriptions. The balance comes from advertising revenue that has more than doubled over the past year. Pandora is the other way around. Advertising revenue was good for $933 million, or 80% of last year's top-line results.

Lend me your ears

Logic would seem to dictate that subscription revenue is the way to go. It's proof that you're attracting an audience with disposable income, and you're not going to generate $9.99 a month from freeloaders based on ad consumption. Apple Music -- like Spotify -- charges $9.99 a month for its service. Apple's big tech peers that also have some skin in digital music have also gone the subscription route. What if they're betting on the wrong digital horse?

Spotify posted a widening loss in 2015. Pandora saw is adjusted profit cut in half, but at least it was still profitable on that basis. With artists, labels, and songwriters looking to get paid with escalating royalty rates, it isn't easy to turn a profit on streaming subscriptions. However, we did see ad revenue at Pandora and Spotify grow faster than subscription revenue, and there's more upside there as sponsors begin to pay up to reach the juicy demographics of the mobile earbud-donning set.

Advertising is a big deal at Pandora, growing even at a time when its user growth has slowed to a crawl. It may seem odd to say it, but could advertising be the better model than subscriptions at this point in streaming music's life cycle? 

Apple doesn't break down the financials of its digital music platforms, but the consumer tech behemoth as a whole is experiencing shrinking margins and profits these days. The other tech juggernauts that jumped into this market aren't making much of a dent, likely losing a lot of money in the push to gain relevance with the mobile masses. 

Pandora is in the right place. Its active listener base has only grown from 79.2 million a year ago to 79.4 million as of the end of March, but at least it's a massive audience that's hooked. Listener hours have grown slightly faster than active listeners over the past year. There's a lot of things that Pandora has done wrong over the years, but the one thing that the market seems to dismiss is that it may be the one with the more sustainable model for a profitable existence. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pandora Media, Inc. Stock Quote
Pandora Media, Inc.
Apple Inc. Stock Quote
Apple Inc.
$137.34 (-1.36%) $-1.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.