Pandora Is in Trouble
Not only do I think the economics of its business model are flawed for investors, it also continues to be attacked from virtually every angle, even as it already goes against CBS' (NYS: CBS) last.fm and Sirius XM Radio (NAS: SIRI) .
The latest threat, and most credible in my Foolish mind, comes from Spotify. The European music service made it stateside over the summer, with fellow Fool Rick Munarriz saying Spotify won't kill Pandora.
Initially, the two services differed enough that they might have been able to play nicely together. Pandora offered its radio approach that took control out of the equation and served up similar tunes you might like. Spotify's promise was on-demand songs you could call up at a whim, along with some built-in social functionality. The service more directly competed with Apple's (NAS: AAPL) iTunes (and its failed social network Ping) and other digital storefronts like Amazon.com's (NAS: AMZN) MP3 Store and Google's (NAS: GOOG) Music Store.
Spotify has now launched a Spotify Radio service. It's virtually identical to Pandora's pitch: "Starting a radio station is easy. Click 'Start Artist Radio' at the top of any artist page or just drag a track to 'Radio' in the left sidebar. Spotify will make a radio station of similar music." It even tops Pandora by allowing unlimited skips. In contrast, Pandora's free service limits your skips to 6 per hour and 12 total per day, in order to save on paying royalties.
I'd like to share a story that highlights my problem with Pandora's business. My wife subscribes to Pandora One, the pay service that removes ads and the daily skip limit. She recently told me how after an extended listening session, Pandora will interrupt the music and proactively ask her if she's still there listening. Since Pandora has to pay a royalty for each song delivered, it wants to be extra sure that she hasn't meandered off and left Pandora dumping money on deaf ears (if Pandora delivers a song in an empty forest, does it still pay a royalty?). The point is that Pandora is feeling the pinch of its royalties.
Even though Pandora was able to squeeze out a little black ink last quarter, the company still lacks scalability. While the revenue growth of 99% initially looks impressive, content acquisition costs outpaced that by increasing 108%. Those costs also comprised a slightly larger bulk of overall expenses -- 50.7% last quarter compared to 49.6% a year ago. Total expenses also jumped 103%, again outrunning revenue growth.
With Spotify launching a service that offers exactly what Pandora does, except without skip limits and with the on-demand offering, Pandora is in trouble.
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At the time this article was published Fool contributorEvan Niuowns shares of Apple and Amazon.com, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Google and Apple.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Google, and Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.