Pandora (NYSE:P) is starting off 2012 with a bang thanks to increased listenership, increased users, new car deals, and new relationships with audio equipment providers. The company is busy at this year's Consumer Electronics Show and is showing off the service and wares for the annual event that typically boasts the launch of many new products..
Some of the more impressive announcements Pandora made:
- More than 125 million registered users
- Deployed on more than 450 consumer electronic devices
- 23 automotive partnerships (OEM brand and aftermarket)
- New relationships with Acura, Kia, DISH Network (NASDAQ:DISH) and Audiovox Electronics Corporation
- Average listener time increases to 18 hours a month
- 68% market share of Internet radio
Why are these points so impressive? Last year Pandora had less than half of the registered users they boast today. Last year the service was available in 200 consumer electronic devices, a statistic that this year they have more than doubled, The company has gone from five car manufacturer brands last year to 16 this year with more to come. Kia and Acura were announced today. Perhaps the most impressive news was the fact that Pandora has a 68% share in Internet Radio use, according to Triton Digital.
Taking a page from Sirius XM's (NASDAQ:SIRI) playbook, Pandora also announced a deal with DISH Network in which the music streaming company will be able to service millions of DISH Network subscribers.
Tim Westergren, Pandora founder and chief strategy officer, probably summed it up best when he said, "Growth of this magnitude reflects a fundamental shift in radio. As more and more people are discovering the joy of personalized radio, automotive and consumer electronics companies are innovating to meet consumer expectations and demand. It's an incredibly exciting time for our business and music lovers everywhere."
What this demonstrates is that Pandora continues to gain traction. Not only are more people registering to use the service, but listenership is on the upswing as well. This presents a unique opportunity for Pandora. As the leader in Internet radio, the company is on the forefront of a personalized, mobile and Internet advertising revolution that will grow by billions over the next five years. With enough users, and enough listenership, Pandora could well be on its way to the profits investors seek.
In the competitive world of audio entertainment, there is Internet Radio, Terrestrial Radio, Satellite Radio and even services like iTunes, Google Music and Amazon.com. With all of this competition, Pandora has been one of a select few Internet radio companies that has been able to survive and get to the cusp of a profitable business model. There are certainly challenges, but when a company can begin to hit a critical mass of people that adore the product, they have the power to bring about real change.
The biggest challenges that Pandora has currently center around the substantial royalty fees the company must pay. Current deals dictate that Pandora pay out royalties on a per song/per listen basis. Essentially this means that each time a registered user listens to a song, Pandora pays a royalty. In the most recent quarter nearly half of all revenue was paid out to royalties. The good news is that Pandora's method of making money is on advertising, and it is advertising that has been, and will continue to pick up in the coming years.
Pandora is at a perfect point in its business life. They are seeing substantial growth due to the mobile market. In fact, it is the mobile market that essentially gave Pandora its first real breath of life that even allowed the company to go public. Each quarter millions and millions of Americans shift over to "smart" cell phones. It is this market that delivers more and more users to Pandora, and in turn, the new registered users that deliver a critical mass of listeners.
As of September 2011 smart phone penetration was 40% in the United States. It is anticipated that over the next two years smart phone use will grow substantially, and as one of the top downloaded apps, Pandora has a vehicle from which to continue onto more impressive numbers.
Disclosure: I am long SIRI.
Additional disclosure: I have no position in Pandora or DISH Network.