When listening to the Q112 earnings call this week for Pandora Media (P), it really struck me that this company was mostly built on the old business model. Sure, companies such as Pandora, Angie's List (ANGI), and Yelp (YELP) have new relevant services, but none of them have veered much from the labor intensive model of hiring local sales reps to find advertisers.
The Pandora earnings call had one very shocking number. The company had hired 79% more sales reps than last year. Sure, the company told a great sales story of how a local car dealership found advertising on its services more compelling than terrestrial music channels since the ads could be more targeted. When, though, will these companies attract advertisers without a sales rep and large marketing budgets?
Developing a business model attracting a bunch of costly users is nice, but how about attracting paying subscribers? Sure Pandora may attract millions of users, but the real issue for media companies, including even Facebook (FB) and Twitter, is that competition for advertiser dollars is fierce.
It doesn't seem like a good business model to not compete on cost, but to definitely compete on revenue. Every additional user costs more money and the corresponding advertising revenue follows later. How long is that sustainable?
Below is a list of the growth in sales and marketing costs compared to revenue growth for the select companies. Note how each corresponding revenue dollar is virtually matched with another dollar of expenses.
Sales & Marketing vs. Revenue Growth
Sales & Marketing
Other Concerning Stats
While reviewing the latest earnings reports, these stats stuck out as equally concerning for the business model.
Pandora - Total listener hours grew by 93% year-over-year showing that revenue only grew roughly half as fast as usage. For this reason, content acquisition costs grew by $26.7M while revenue only grew by $29.7M. Not a good sign when a music station can barely outgrow content costs. The other surprising stat was that the U.S. radio listening share expanded to nearly 6%. The company has a much larger portion of the market than it should without being profitable.
Cash balances dropped to $80.6M after dropping by $10M in the quarter due to the operating losses. A few more similar quarters and cash will become a major issue.
The major hope appears that pure size will finally translate into higher ad growth than costs.
Angie's List - Expenses continue to outpace revenue even with 76% revenue growth. The company did see membership growth in excess of revenue. Though the company is one of the few new media public companies to actually collect paid memberships, it quickly loses any benefits from such arrangements with sales and marketing expenses that nearly match revenue.
Shareholders recently unloaded nearly 9M shares in a follow-on public offering at $13. Considering this price is at the lower end of the range since being public, shareholders must not be overly confident in the future of the company.
Yelp - Active local business accounts grew much faster than revenue at 117%. Adjusted EBITDA actually dropped over last years loss showing that the model continues to spend more than revenue can grow. User contributed reviews only grew 59% to 27.6M showing that the majority of active unique visitors of 71.4M don't even post reviews.
This company probably holds the game plan for where those companies want to go. In Q112, Groupon (GRPN) was able to nearly slash marketing expenses in half in order to boost profits. Combined with nearly 100% revenue growth, Groupon was able to turn a sizeable year ago loss into a small profit.
The question still looms whether the marketing cut will lead to reduced ad spending in future quarters. On the other hand, if Groupon just proved the thesis that large upfront spending on marketing would ultimately lead to market share domination and the ability to cut spending, then these other new media companies might be able to follow that game plan as well.
Some new media concepts appear to be a rehash of the old media model with a better mousetrap. Until these companies are able to invent a better way of attracting revenue, whether advertisers or user fees, the companies will struggle just like the cohort the group is attempting to replace.
Unlike the old media that had decades to become established, new media companies such as Pandora are starting to face stiff competition from new entrants such as Spotify. The concept of collecting users and figuring out how to monetize it will likely backfire on most of these companies in the end.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.