Pandora Will Never Turn A Profit (And Other Lies)

| About: Pandora Media (P)

Within the vacuum of the nonsensical Pandora (NYSE:P) vs. Sirius XM (NASDAQ:SIRI) debate, I spent months living in a relatively quiet frustration. Nary a day went by that somebody did not spout off about how Pandora would never turn a profit. Not only did I know that statement was false, but I knew, with a considerable degree of confidence, that Pandora would verify it as untrue sooner rather than later.

Consider what I wrote back in late September:

Expect Pandora to begin posting profits by mid-2012, if not sooner. That's right. I am making that prediction. And I'm generally not one to make such bold predictions without qualifiers. Pandora will turn the corner to profitability, and stay there, by mid-2012, if not sooner.

Man. I hate being wrong. I should have said that Pandora would post profits this past quarter. Oh well - at least the second half of the prediction looks good. Even though I think it's conservative, I'll take Pandora at its word and expect an unprofitable Q4. Consistent profitability will ensue come mid-2012, right on schedule.

The saddest part about the Pandora will never make a profit meme is that most of its spreaders derived it from plain lies and distortion. They took a CNBC interview with Pandora CEO Joe Kennedy and claimed that Kennedy, himself, admitted that the company would never be profitable. The few with a conscience tempered the lie by noting that he does not know if Pandora will be profitable. What Kennedy did say is that the company has never set a timetable for profitability. Big diff.

The same people who spread the lie that took on a life of its own often contended that the research they conducted into Pandora proves that it will be a loser. This "research," however, generated little more than flimsy, vague and often false assertions, such as content costs at Pandora grow faster than revenues (a claim easily proven untrue here). Alas, spending 20 minutes skimming a Wikipedia entry, using fancy syntax in a Google search and reading message board posts does not really qualify as research. Contributing to an echo chamber does not constitute due diligence.

With a company like Pandora, you need to do some work on the ground and see if it matches up with the things the company does - and other companies are doing - behind the numbers. I conducted that due diligence. In the process, I discovered that, on the street, local broadcast radio faces formidable competition from Pandora, known to ad agencies as "WPAN" or "KPAN." It's not the type of competition that will drive terrestrial radio out of business, but it does represent an encroachment on territory once reserved for terrestrial radio alone.

Many ad agencies now include Pandora on buys that used to send all dollars to terrestrial. The response from local advertisers proves even more encouraging for Pandora. At this stage, the only problem Pandora faces is being able to meet demand on this front. That's why the company might, as it predicts, lose money this quarter - it's busy spending cash to ramp up its local sales teams. Once in place, look out. According to company CFO Steve Cakebread, the process of constructing local sales forces takes several months.

To this end, it should come as no surprise that a pretty smart guy, Bob Pittman, now CEO at Clear Channel (CCMO.PK), spends most of his time integrating iHeart Radio with his physical stations to create a multi-platform powerhouse for advertisers. The beauty for Pandora, as Cakebread points out in the above-linked webcast, is that the pie for multi-platform advertising is pretty big (and growing exponentially), leaving room for several players.

As for competition, I do not deny that it exists. As I argue with reference to Sirius XM, if another product (i.e., the iPod) or service (e.g., Spotify) has your ear, the company that loses your ear during that time should consider that product or service competition. That said, I think the truth sits somewhere between the notion that Spotify will render Pandora obsolete and Pandora management's contention that Spotify is merely a complimentary service.

Bottom line: Just as the ad market has room for terrestrial radio, web radio and, if it gets its head out of the sand, satellite radio, the competitive landscape has room for plenty of survivors in the broad audio entertainment space. But, no matter what's happening competitively, one thing remains intact. And that's Pandora's growth, both in terms of revenue and listenership. Consider the latest numbers from Triton, courtesy of's daily email:

Simply put, if Spotify is gaining traction, it hasn't exactly hurt Pandora yet. Nor has it hurt anybody else for that matter, as iHeart and Slacker both posted gains in October listening.

I continue to hold a long position in Pandora stock. I intend to keep adding to it in small lots, using a dollar-cost-averaging account. I think that's the best way to play a volatile stock with massive long-term potential that will trade in near-term fits and starts. On down days, I augment my regular bi-weekly buying schedule by throwing $50 to $100 at the stock. If you believe in what a company does, I think this approach makes sense for small and even large investors. You can use relatively small amounts of money that do not hurt your cash flow, but build a meaningful position in the stock over a multiple-year time horizon.

Disclosure: I am long P.