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Pandora's Current Troubles

Pandora (P) stock is up 65% already this year, and is showing no signs of slowing down. Oddly enough, this rapid gain in stock price has come at a time when the majority of Pandora's user metrics are declining.

Take a look at how Pandora's 3 key audience metrics have faired in 2013.

MonthJanuaryFebruaryMarchAprilMay
Listening Hours (YoY growth)47%42%40%24%22%
Active Listeners (YoY growth)38%37%36%35%33%
Share of US Radio8.03%8.48%8.05%7.33%7.29%

Growth in listening hours has been in steady decline since January, and now has a growth rate that has been cut in half in just five months (47% vs. 22%). Active listener growth has declined by almost 20% since the year began, and this is particularly worrisome when compared with the more rapid decline in listening hours.

As of April, active listener growth has been faster than listening hours growth. This indicates that users are spending less time using Pandora than they were in January. In May this trend was confirmed and the divergence widened between growth in active listeners vs. listener hours.

Here's another table to illustrate this point.

MonthJanuaryFebruaryMarchAprilMay
Listener Hours1.39B1.38B1.49B1.31B1.35B
Active Listeners65.6M67.7M69.5M70.1M70.8M
Hours Per Listener21.1920.3821.4318.6919.07

Although the trend isn't perfectly linear, it's clear hours per listener is in a down trend. From January to May, users were spending 10% less time on Pandora's service.

Another interesting number to note is Pandora's share of the U.S. radio market. This number has been steadily increasing since the company went public, until March of this year. As you can see in the first table above, Pandora's share of the U.S. radio market has been steadily declining for three months, and is now 9% less than it was in January.

Impending iRadio Launch

What's particularly worrisome about Pandora's declining audience metrics, is that all these numbers are pre-iRadio. For those who don't know, iRadio is a service Apple (AAPL) is expected to unveil at its WWDC scheduled for today.

From a consumers perspective iRadio will be almost exactly like Pandora. A free version will be available with ads, as well as a paid version that will most likely be ad free. This is a carbon copy of Pandora's current business model.

Apple already has over 500M users, which is second only to Facebook (FB). It's pretty reasonable to assume that a majority, or at least good portion of Pandora's users also are within the Apple ecosystem. If just 5% of Pandora's current users switched to Apple's service, that would be equivalent to 3.5M people. That would be enough for Pandora's active listeners to actually decline sequentially.

One last interesting tidbit about Apple's iRadio; the company is alledgely paying music rights holders more than twice the advertising revenue that Pandora is (10% vs. 4%). If this causes Pandora to raise its cost structure in any way, it could have a major impact on Pandora's almost nonexistent margins.

Conclusion

Pandora's net loss actually expanded in Q1 of this year, from $20M to $28M. This highlights how precarious its business model may already be. Any further decline in profitability could cause a major drop in Pandora's stock price.

With audience metrics that are already weakening, a successful iRadio launch will continue to stall Pandora's growth. If any additional pressure is put on Pandora to restructure its advertising fees, this will further damage the viability of Pandora as a sustainable business.

Source: iRadio Launch Could Be The Final Nail In Pandora's Coffin