Threats to success (with a graph) Cost structure: . Pandora pays royalties for every song played: membership and listening hours Increases, royalty expenses Increase at a linear rate. Until last year, Pandora was not yet profitable, the biggest concern of investors. But what’s worth considering is that Pandora seems to have addressed the biggest concern of investors – whether or not It can create a profitable business. And the business seems sustainable as the company expects to continue generating profits for the full-year 2014, despite expecting some loss in the first quarter. While market valuation is certainly under doubt, Pander’s transformation into profitable business is encouraging considering the losses it experienced in the past few years.
Slide 2 – royalty volatility . Pandora is in a constant battle over royalty prices. Threat: While internet radio royalty fees are expected to rise with time, increasing number of users and Increasing listener hours will also require Pandora to pay more loyalties in the per track fee agreement. Pandora maybe be unable to favorably renegotiate royalty rates with the Copyright Board. If this implies that Pandora can not bring down these costs (as % of revenues) from current levels, there could be about 40% downside to Trifles price estimate.
Recently, Pandora has announced that It has filed a motion In federal court alleging that ASAP (performing rights organization) has been discriminating against Pandora compared to similarly situated services like Clear Channel’s radiation in various rates (for musical compositions) it gives to fellow webmaster radiation because Hardhearted is owned by Clear Channel (first mover-internet radio make), which also owns several hundred AM/FM broadcast stations.
So, Pandora has now purchased an FM radio station so it can also be eligible for the lower rates (regarding that are only available to internet radio services owned by terrestrial broadcasters. During an investor conference in early 2013, Pandora Media’s management had stated that the company expects to lower its content acquisition costs (as % of revenues) to 40% over the next few years. Pandora seems to be on the right track, as is evident from the cent Jump in its mobile modernization.
The company had earlier been lobbying for a bill called the “Internet Radio Fairness Act”. This bill is aimed at bringing the Internet radio business under the same roof as terrestrial and satellite radio. The basic issue is that Pandora pays much higher royalties (as a % of revenues) for music compared to traditional radio companies such as Sirius XML. Part of this has to do with higher rates and partly with the fact that Pandora is an under-modernized service, due to its almost sole dependence on advertising revenues.
However, the company recently eve up its legislation efforts and will instead seek other resolutions for reducing royalty rates. Nevertheless, it is worthwhile to see how Pander’s value could be impacted if the royalty rates (as % of revenues) were to reduce to the level that Sirius XML currently enjoys. There would be additional growth potential for the company if the rules that govern the royalty payments were to be altered to make them consistent across broadcast, satellite and Internet radio.
Slide 3- Graph sound exchange Exchanging (non profit organization) – exists to administer statutory licenses for mound recording copyrights, primarily through the collection and distribution of royalties for sound recording performances occurring under the Jurisdiction of U. S. Law. Exchanging handles the following duties with respect to statutory licenses. Why Pandora almost collapsed: On August 16, 2008, popular Internet broadcaster Pandora announced that it may have to cease operations, citing Gaucheness’s much higher royalty fee on Internet compared to satellite broadcast. 21] By 2010, Internet radio stations like Pandora will be expected to pay an estimated 2. 91 cents per hour per listener, while satellite radio loud pay a much lower 1. 6 cents, and terrestrial radio would pay nothing. With Pander’s current business model, the fees which Exchanging levy would amount to 70 percent of its revenue, making the service unprofitable. In comparison, satellite radio pays about nine percent of its revenue, as defined by their contract with Exchanging, and terrestrial radio does not pay any of those fees, although it does pay royalties to other organizations.
As a founding member of the Mistrust coalition, Exchanging does not support the Internet Radio Equality Act, believing that the proposed legislation would unjustly rut the interests of performing artists, musicians, and copyright owners as it would However, the Copyright Royalty Board assigned different rates and terms for satellite radio and Internet radio. They both have extremely different business models, and the methodology for creating rates and terms are based on completely different approaches.
The rate for Internet radio under the CURB ruling is not derived by assessing the revenue or expenses; it is derived on a “per performance” basis. The rate for satellite radio, on the other hand, is derived by a percentage of revenue. Renegotiation(Deal with Pandora) – Exchanging also offered alternative rates and terms to certain eligible small webmasters, allowing them to calculate their royalties as a percentage of their revenue or expenses, instead of at a per performance rate. Slide 4 and 5 – revenue growth v. s total CIA growth.
Pandora lost 2. 8 million active listeners in January. While January is traditionally a weaker month for Pandora, this year it lost 3. 7% of its users, compared to a loss of 2. 2% a year earlier. Growth in total listener hours followed the same downward path from 49% year-over-year increase in March of 2013 to Just 13% last month. Analyst: Although the company reported positive earnings and strong modernization growth, the outlook for 2014 fell below consensus estimates, indicating that market may have been overvaluing the stock.
For full-year 2014, Pandora expects its revenues to be in the range of $870 million to $890 million, with mid-point of this guidance representing year-over-year growth of 36%. This figure is notably below that for the calendar year 2012, and could be a result of an expected slowdown in the growth of the number of active users and ad RPM (revenue per 1,000 listener hours). Slide 6: Market Saturation
Pandora expansion Just in long run: What’s important is that it has started generating profits, and could use its cash flows to fund overseas expansion in the longer run. Competition: Of the large social stocks, one of the biggest competition risks is Pandora. Its rivals include Apple (PAPAL), Amazon (AMAZON), Google (AGOG), Spottily, radiation, Radio, OMG, Slacker, Concluded and Sonata. All of those platforms pose a risk for P stock. Now Pandora must deal with a new entrant, which could take away serious marketers: Beats Electronics.
The company will certainly leverage its large footprint n the headphones/speakers business. But Beats has already struck a distribution agreement with AT&T (T) for its music service and has an advertising campaign with Ellen Degrees (including its Super Bowl commercial). In light of all this, it should be no surprise that P stock got hit on concerns about its outlook for the year. Slide 7: Just show the graph with Pander’s model Slide 8: Just show slide: Advertising v. s. Membership Along with the increase in mobile internet usage, mobile advertising spending is expected to grow rapidly. Pander’s music app is already one of the most popular APS in the world and thus places the company in a strong position to capitalize on the expected mobile advertising growth. Interesting mix of advertising options on Pandora, higher user interaction on Pandora ads, and expansion in other territories could make Pandora attractive for an increasing number of businesses.
Certain factors such as mobile internet usage growth, Pander’s expanding sales force, the company’s foray into the automobile segment, additional content, and most importantly, international expansion can lead to an increase in the growth rate of Pandora users. The company has been ramping up its sales force to sell more mobile d inventory slots to advertisers who are directing some ad budget to Pandora because of its local appeal and targeting ability.
The additional selling and marketing costs have offset the margin growth to some extent. Slide 10 and 11- Just demonstrate Pander’s strategy Slide 12 – Focus in local advertising campaign – Increase and target local advertisers, increase the adds in mobile devices. Slide 13 – Read the lines: Focus – Marketing aggressive; investments on mobile expansion. In counterpart, sales and advertising costs (due to heavy investments) are high and are affecting stock prices. Side 14 -Just wrap up – future and possibilities.