Pandora Goes On The Offensive, Takes It To Traditional Radio

| About: Pandora Media (P)
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Before Pandora's (NYSE:P) last two earnings reports, I urged investors to proceed with caution when considering fresh long plays.

On the company's Q4 2012 report, staying away spared immediate on-paper losses. Though, Pandora's stock recovered nicely, it took several weeks and went on a pretty volatile ride. Based on Wednesday's after hours trading, a pre-Q1 2013 earnings long play would have performed quite well.

No matter how random quarters turn out, I stand by my own advice of not opening a new position in a stock like P ahead of earnings. While new positions trouble me, if you're scaling into a long-term position like I am, it really matters little how you time your buys. If the company ends up executing, yesterday or today's entry price will likely mean very little.

I am, however, adjusting my outlook on buying Pandora's stock after what I heard on the company's Q1 2013 conference call led by CEO Joe Kennedy. For long-term investors, Pandora has officially become a screaming buy. While it's still speculative, the opportunity Pandora has positioned itself to seize is too large to pass up. Over the course of the next two years, I expect this stock to run like Lululemon (NASDAQ:LULU).

This Seeking Alpha StockTalk provides a nice recap of the numbers:

(Click to enlarge)

However, the real meat of the call came during the Q&A segment of Pandora's earnings call where Kennedy killed it. Without a doubt, I have not heard Kennedy do a better job during his entire time as CEO at Pandora. He has a way of subtly slapping the competition in the face.

Let's take the salvos one-by-one. Attribute text in italics to Kennedy, normal font is my reaction.

Arbitron (NYSE:ARB)

I think in many ways the fact that the Triton service is a census-based service makes it compelling, and is the basis for the Media Research Council certification that Triton has for that product. Arbitron has struggled to get Media Research Council certification for the PPM product, because of the difficulty of recruiting adequate sample to be properly representative in all of the markets.

In several articles, I have chided Arbitron as a disaster of a company. It relies on Clear Channel (CCMO.PK) for a lion's share of its revenue. It relies on terrestrial radio operators for a vast majority of it. Because of these relationships, Arbitron has failed to step into the century and measure digital formats in any meaningful way.

If it was not, for all intents and purposes, controlled by companies like Clear Channel, it would have probably purchased Triton and started to shift focus to digital and mobile platforms. Of course, the last thing Clear Channel wants is a reliable gauge of just how strong the shift to digital actually is.

That aside, Triton uses census-based measurement. Arbitron uses samples. I have nothing against samples; in fact, I spent several years of my life drawing them for my own research.

You draw a sample because it's not possible to query your entire population. And, even if it was, it's generally cost-prohibitive. That's not the case for Triton, which knows when somebody is connected to Pandora. It counts every connection. Unlike Arbitron, it does not have to generalize statistical data from a sample to the target population.

Here's more from Kennedy on Arbitron:

We don't see the absence of Arbitron as any significant impediment to our development of this market. Triton is actually out front in terms of internet radio measurement. They were the first person in the market. Their national webcast metrics product is Media Research Council-certified, and I think it's an absolute, perfectly fine solution for us to grow the business on. So we certainly would welcome Arbitron joining the market, but don't see that as any significant drag on our development of the radio advertising business.

Translation: Thanks for playing Arbitron, but you're no longer needed. Simply put, time and it's own stubborn inability to innovate out from under the thumb of Clear Channel will pass Arbitron by and render it irrelevant.

On Raiding Terrestrial Radio Sales Forces

... the overwhelming majority of the people that we are hiring in terms of local radio ad sales force and national radio ad sales force are coming from the existing broadcast radio groups. We're finding good ability to attract great people who see Pandora as the future of radio, and as the future of radio advertising. And we would expect, as we continue to grow, that we'll continue to attract a number of great people from the major radio broadcasters.

It's not an overstatement to say that, from some corners of terrestrial radio, a deep hatred exists for Pandora. I can hardly blame them. Tim Westergren built a better mousetrap. Bottom line. And, with a major assist (iPhone) from the company Steve Jobs built and Tim Cook can only hope to maintain (that's Apple (NASDAQ:AAPL)), he has assembled a team that continues to take everything that matters to broadcast radio away from it. Market share. Sales talent. And, most importantly, advertising.

Kennedy did not mention Sirius XM (NASDAQ:SIRI) on the call.

Of course, Mel Karmazin plans on introducing the satellite radio knock-off of "personalized radio" later this year. He also sees no way Pandora's business model - or any other type of ad-supported Internet radio - can work. Like his terrestrial radio counterparts, Karmazin can't seem to stop talking about as well as mimicking Pandora.

It's likely this shocking ignorance and stunning lack of vision that renders satellite radio irrelevant in Pandora's mind. In due time, Kennedy will likely never mention broadcast radio again.

On Wednesday afternoon, he put the entire terrestrial industry on notice. It's about to become irrelevant as well.

Disclosure: I am long LULU, P.