Sunday, April 14, 2013

The understated future of Pandora

Pandora is becoming a huge player in radio, fast. Within a few years, it is shaping up to be one of the top radio companies in the US.

Most recently, they've announced that they captured 8.05% of the US radio listening with 1.490 billion hours listened in March. This was up 40% in listener hours YoY I decided to chart out the past year of Pandora's listener hours vs. the total market. It's... revealing.

Why, look at that, Pandora is climbing while the overall market is stagnant. And all they had to do was add servers and bandwidth, not buy up radio stations or new content.

I could have gone further back to get a better idea of trends, but, if you extrapolate these numbers out over the next four years, Pandora will capture somewhere between 19-35% of the market. Pandora is now shipping with cars as much as XM radio.

Consider this for a minute:
But wait, then why is Pandora's margin so low?

The problem for them is in digital radio licensing. Unlike terrestrial radio, Pandora and XM get ripped off by the music labels for radio licenses. It's very, very cheap to get a radio license for a traditional radio station, but not so much for digital.

One theory is that at the end of the day, the labels are going to have to come back to Pandora and XM with hat in hand to try to get better rates. They cannot grow the overall base unless these two media survive and do well. They don't interfere with individual marketing and sales efforts because they are radio. Radio is great advertising for music that people want to buy.

The other lever Pandora can pull is is original programming.

Sirius/XM has made some massive content bets over the past several years. Howard Stern, the MLB, NFL, etc. I'm guessing they paid out the nose for these rights. And I imagine they got more listeners. And they almost went bankrupt in 2009 so I'm not sure this worked as planned. XM is really a service that only makes sense in the car anymore. Everyone else is going to have internet, and Pandora is making a lot of inroads into the car.

I guess one way to look at it is that Sirius/XM took the Groupon model: spend a lot of money to do a land grab. Pandora is taking the slow, steady route. Get land without spending as much, then start pulling levers later. I would say that Netflix followed a similar tack. Only in the past 12 months, 4 years after starting to do Netflix streaming, have they leveraged the original content lever. Over the 4 years prior, they grew huge while paying out the nose for content. Pandora is in a similar situation.

I own Pandora stock. I bought it after I heard this discussion in a coffee shop between baristas:

"Hey, is this Pandora?"
"Why do we have ads, you didn't pay for it?"
"We should"

The end.

To me, $36 a year is an amazing bargain -- 1/4 the price of Spotify (which I also subscribe to) and they have more music. I realized, why isn't every small business subscribing to Pandora? Combine that with advertising and that's a huge market.

So anyway, we shall see what happens. I thought they had a bright future, so it's nice to see the numbers sort of back that up.