Pandora (P) reported earnings after the close on Thursday. While the numbers were encouraging, once again, it's the story that counts.
Click here and take a listen to this sound byte from Pandora CEO Joe Kennedy.
I spent quite a bit of time in and around terrestrial radio. And no matter what station I worked at the goal was a younger audience. Radio has always salivated over the 18-34 demographic, but most forms of radio, save a terrestrial format here or there, have been unable to capture a significant portion of it.
The stations I worked at with an age 35-to-dead audience wanted to find ways to capture the 18-34 year olds. In fact, that's why several of them hired or auditioned me. The stations I worked at with younger audiences always wanted more in the 18-34 age group. Very few succeed in the quest for this demo. The ones that do generally sport good 25-54 numbers are well and rank as market leaders in ratings and often revenue.
For decades, terrestrial kept doing what it was doing in this quest for the 18-34 year old. It never innovated. It rarely tried anything new. It stood by passive, resting on the fact that it's free and everybody has and uses a radio. Meantime, Apple (AAPL) came along with the iPod and gave radio an initial push toward the edge of the proverbial cliff. If that wasn't enough, Internet radio emerged and then people started listening to audio on mobile devices.
While terrestrial will always be around - and command considerable ad revenue - Pandora will be a reason why the business will struggle to sell itself going forward. Clear Channel (CCMO.PK) is doing a formidable job positioning its iHeart Radio against Pandora, but it's still a reaction and little more than a cheap imitation.
Pandora can walk into an ad agency and show off ratings that trump legendary stations in the nation's largest markets while explaining that they're on the way to owning online and mobile. Pandora already commands terrestrial radio-like ad rates online and it intends to get there with mobile. All of this hyper-growth and it has only captured less than 4% of the U.S. radio market.
That's about as ground floor as it gets. And this is not some slow-to-moderate growth story. It's hyper growth. Growth tends to come in 100% increments at Pandora.
And that growth shows no signs of hitting a wall. Consider total listener hours and subscriber growth, respectively:
Both active users and listening hours grew nicely from the previous quarter. Pandora finished July with 37 million active users, up from 36 million in mid-July and 34 million on April 30. (An active listener is one who has requested an audio stream in the last 30 days.) Listener hours were 1.8 million, up 13% from 1.6 million in the previous quarter and up 125% from 800 million in the prior-year period. With that increase came a greater share of the radio market. The company estimates it had a 3.6% share of all radio listening in the quarter up from 1.8% last year.
Up until now, Netflix (NFLX) and Sirius XM (SIRI) stood as the two big dogs in terms of attracting subscribers. Net subscriber additions at both companies, however, appear ready to hit a wall, if they have not already done so.
From Netflix's Q2 letter to shareholders:
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