February 12, 2011

Pandora Files for IPO, But Can It Ever Make Money? - Deal Journal - WSJ

Online-music service Pandora Media today filed its much anticipated IPO, which gives us our first public glimpse at the company’s business plans and successes.
First, the good news.
Pandora’s revenue has sharply ramped up in the last couple of years. Revenue shot up from $19.3 million in the fiscal year ended Jan. 31, 2009, to $55.2 million for the next fiscal year. For the nine months ended Oct. 31, Pandora posted another huge revenue jump to $90.1 million. More than 85% of Pandora’s revenue comes from advertising, with the bulk of the rest from subscriptions that Pandora sells for ad-free streaming music.

Bloomberg News
Pandora founder Tim Westergren
But wow. Content acquisition — what Pandora pays for the rights to songs — is costing them a fortune. That’s the (very) bad news.
Those costs were $45.4 million for the latest nine month period — equal to half of Pandora’s revenue. The more people listen to Pandora and the more money Pandora makes, the more those costs will grow, putting pressure on the company to sell a boat load more ads than it does now. Largely because of the content acquisition costs, Pandora mostly has been unprofitable.
That’s not totally a surprise, of course. The music royalty fees long have been a question mark about Pandora’s business. Pandora fought hard several years ago to rework the music industry’s royalty fee structure. But now we know just how much those royalties are denting Pandora. On a percentage basis, those costs are down from about 80% of revenue in the fiscal year ended Jan. 31, 2009. But still: How sustainable is Pandora’s business if it has to pay out half or more of its revenue just for the rights to music?
Pandora doesn’t expect the problem to abate soon. The company said it expects it revenue growth rate will slow, because of competition and the “maturation of our business.” And here’s what the company said in its IPO filing about its profits (or lack thereof):
“[A]s our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses. If we cannot successfully earn revenue at a rate that exceeds the operational costs associated with increased listener hours, we may not be able to achieve or sustain profitability. In addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations. As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.”

Pandora Files for IPO, But Can It Ever Make Money? - Deal Journal - WSJ

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