By Andrew Hawkins
Pandora Media (P) is the newest internet IPO on the street that has earned huge evaluations along with a lot of skepticism. Pandora is following in the wake of some other high profile IPO’s like LinkedIn (LNKD) and Renren (RENN). Pandora shot out of the gates on Wednesday from $20/share to $26/share only to fall. It closed the first day at $17.42. LinkedIn, on the other hand, had a better first day of trading. It started at $83/share and ended up at $94.25/share. I, like many others, have been searching high and low for a justification for these tremendous valuations.
Pandora is an online interactive radio experience, which operates with a “free-mium” business model. The basic experience is free and contains ads, but users have an option to pay $36 per year for a premium account. Pandora’s products and services have garnered “more than a 50% share of all Internet radio listening time”, according to a November 2010 report by Ando Media. With 50% of its target market, Pandora is still managing to lose money. Pandora recorded a net loss of $18.637 million for fiscal year 2009 and reported a net loss of $328,000 for fiscal year 2010. A large problem is that Pandora has huge fees paid for the music and content. This makes every “free” member, a huge burden. Also, with a price tag of $36/year, Pandora is substantially more expensive than the array of free music options available on the internet. Pandora is also locked into its current cost structure until 2015, when contracts are up for renegotiating.
Aside from the fact that Pandora is not yet making money, Pandora has no competitive barriers and is facing huge competition by Google (GOOG), Apple (APPL), and Amazon (AMZN). With no lock-in factors, Pandora could see its customers leaving for the next best thing. Google Music, Apple’s iCloud, and Amazon’s music cloud all have the potential to draw a devastating amount of Pandora listeners away. The new push towards the cloud by these three technology giants signaled for me a shift away from basic Internet radio and towards a cloud music experience. There have also been a lot of comparisons between Pandora and Sirius XM Radio (SIRI). I believe that this comparison was brought about by Pandora's attempt to be pre-installed in automobiles and Blu-Ray players. I still believe that Pandora falls short of satellite radio because of the lack of live content, sports reporting and talk shows.
So is Pandora the next Internet giant? From everything I have seen, read, and heard about Pandora, I would say no. It is a long shot from being a long term bet and I would not hold onto shares of this company. I have been a Pandora user for a couple of years now and I am anxiously waiting for a new, better way of listening to music. I, like many other Pandora’s listeners, have very little loyalty to Pandora and I will be happily switching once I find a better music listening experience.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.