Earlier this week Soundcloud’s financials revealed that the company was haemorrhaging cash (even before it had to start worrying about content license fees). Now news comes that Pandora is working with Morgan Stanley to meet with potential buyers. Back in Q4 2014 free streaming got a stay of execution when the majors decided to put their weight behind freemium after a period of many executives seriously considering canning the model. In 2015 free streaming was the growth story, with YouTube out performing everyone. Now though free streaming looks to be in seriously troubled waters. So what gives?
Pandora’s Problem Is Wall Street
Probably the biggest problem of all that Pandora has is the story it tells Wall Street. Every year Pandora accounts for a little bit more of total US radio listening, builds ad revenue and steadily strengthens its business. But that’s not the sort of story Wall Street expects from a streaming media company. Investors expect dynamic growth. But Pandora is, along with Rhapsody, the granddaddy of streaming and had 10 million users before Spotify was even launched in Sweden, let alone the US. Pandora long since passed its dynamic growth stage in the US and is now a mature business that is going about sensibly building a sustainable business.
The standard thing to do at this stage for streaming companies is to roll out internationally and find new markets where you can start a new dynamic growth story. This is exactly what Netflix is doing now that US subscriber growth has slowed. The approach has also served Spotify well. But the unique compulsory licensing structure in the US the underpins Pandora’s business model does not exist elsewhere. There is no global landscape of SoundExchanges for Pandora to plug into. With the exception of Australia and New Zealand Pandora has not been able to negotiate rates that it launch internationally with.
Actually, Slowing Growth Is A Problem Too
All of which explains why Pandora has gone down the acquisition route, buying Next Big Sound, Ticket Fly and Rdio in a bid to become a full stack music company. The problem is that Wall Street either does not buy it, or simply does not get it. In fact, Wall Street does not really make much of a distinction between semi-interactive radio or on-demand streaming. The pervasive view among the investor community is that Pandora is being out competed by Spotify, regardless of the fact that there is only partial competitive overlap in terms of value proposition, target audience and business model. The net result is that Pandora’s market capitalization has fallen from $7bn to $1.8bn and to make matters worse it had to raise $500 million in debt, with revenue growth slowing.
Pandora Needs A New Wall Street Narrative
In just the same way Apple needs a new Wall Street narrative, so does Pandora. Even if just to maintain some market value while it finds a buyer. The full stack music strategy should be central to that narrative, even though the real story is that Pandora is the future of radio. Unfortunately that story will take a decade or more to play out and most investors do not have that kind of patience. (Spotify, these are the sorts of problems you’ll be having to worry about this time next year). And, to be precise, it is the Pandora model that is the future of radio, not necessarily Pandora itself. Though the odds are still on Pandora playing that role, in the US at least.
If Pandora really does not have the stomach for seeing out the long game it should not find it too difficult to find a buyer, if the price is right. Exactly because Pandora is the future of radio, some of those big radio incumbents are likely buyer. Hello iHeart Media.
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I don’t understand why businesses that are decently profitable but have ended their rapid growth cycle end up struggling so. Twitter is another that comes to mind and also EMI music – which was a nicely stable and profitable business at the end of the transformation and before being swallowed by UMG. As you say, Netflix has the same problem in the US and will be exposed as such once they’ve got a little closer to that state in a couple of other big countries.
I’ve thought for a long time that Microsoft would be a logical buyer for Pandora. Their own music service brand is probably the weakest one among large tech/media companies, and having a better music product might be worth something in a bundle with their other services like Office 365 (perhaps it could even include B2B background music service for corporate clients). Access to all the subscribers’ info could be valuable too.
The lean-back aspect of Pandora also seems to overlap with the core of MS’s consumer-base, which is a little less hipster and more middle of the road than Apple’s. Moreover, to the extent that MS is now competing with Google in advertising, it would give MS entre into another advertising space with growth potential. MS also likely has the cash on hand to take a longer view and perhaps get licensing deals done in other territories.
Obviously, a lot of these same things could be said for Google as well. But to the extent that both companies are attempting to make money from a mix of advertising/search/and services, it seems like revenue from the services bundle is a significantly bigger piece of MS’s overall revenue pie than Google’s. So enhancing the bundle may be more important to MS, as long as the enhancement doesn’t hurt the margins of the overall bundle too much.
That said, iHeart Media makes sense too, although I wonder if that could create and anti-trust issues.
Follow the money folks. Artists deserve a fair shake of the revenue pie but that does not really happen unless you are a superstar with tens of millions of streams. How can a streaming business model really work when 70% of revenues go out the door before, as a business, you have to support GS&A and server costs. While I throttle between Spotify premium and Pandora (because like many I lean back and forward) the “future of radio” is a heady statement when most radio listening is done in the car—- where you do not have dependable wifi or even dependable cellular connections.
Full stack music companies sounds like “meet the new boss”—a new version of labels. Economics and consumer behavior will drive the future—and it ain’t bright if these new internet content businesses can’t make money. Look at Netflix–what is driving engagement is not catalog—-rather it is their own content.
I suspect the (a) new model will allow for a hybrid of what youtube creators are discovering—there is money in building your own audience channels with a company that really knows how to leverage advertising—-we’ll see.
Wall Street is the Problem? After losing money for a decade it is pretty obvious what the real problem is. Music streaming is a flawed business model that devalues music and loses money. With the exception of Sirius XM, I know that’s a stretch because they’re a satellite service, these guys are all losing money, unless, like Sirius, Apple Music and Tidal, they are committed to enforcing a paid subscriber model.
To lay the blame at the feet of Wall Street for this is absurd. To enable Pandora to have remained in business or prop-up a money loser like Spotify is the real problem with Wall Street.
It is pretty sick and business un-savvy industry.
Spotify, Deezer, Shazam are equally confused with bad financial news in the woodwork.
All of it inside of $200B dollars of music goodwill obvious to a stranger currently monetizing at $14B and slowly progressing to $25B of subs and ads in 2025. Only if lost folks work hard enough!
Thank you UMG, RIAA and IFPI.
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