Investors are getting nervous about Pandora. The stock fell 24% today as several analysts cut their rating on the stock after the company forecast higher-than-expected losses.
Citigroup analyst Mark Mahaney was among them, citing “mobile monetization challenges” as costs increase faster than revenue. “As a speculative buy, with no profitability track record and no near-term profitable outlook, Pandora always carried very little margin for error – and now there’s error,” he tells clients.
Pandora’s stock lost more than a fifth of its value in after-hours trading late Tuesday as investors expressed concerns that the company’s revenue isn’t keeping up with its expense growth. Pandora reported a fourth-quarter loss that was more than twice as big as a year earlier and said its losses in its first quarter would be as much as ten-times what analysts had been expecting.
November, 2011 10:04:00
Richard Greenfield at BTIG Research has been actively analyzing Pandora Media from its pre-IPO stage, but he’s not exactly well-liked by management, since he has been negative on the stock from the get-go.
In fact, he thinks the stock is so over-priced that he lowered his target price to $3.75 in September and maintained the “sell” rating he’s had on Pandora since day one. Now he’s complaining that Pandora management won’t even let him ask questions on the company’s quarterly conference calls.
Pandora reported fiscal Q3 results last week that touted record revenues. However, the company also reported a drop in profits from a year ago. For the second straight quarter, according to Greenfield, he was denied the opportunity to ask a single question – although there was plenty of time for some other analysts to ask follow-up questions.
On the BTIG website Greenfield has posted six questions he was prepared to ask, if only he had been called on during the conference call. To summarize, he wanted to know:
1) Why are registered user numbers are flattening out?;
2) Why has the growth rate in Active Users decelerated?;
3) Why is Pandora’s Music Genome Project better than the competing Echonest technology?;
4) Is management satisfied with Pandora’s social media visibility?; 5) Why did the share of mobile listening stop increasing?;
and 6) What percentage of mobile listening is occurring in automobiles?
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Pandora Media posted record results for Q2
Pandora Media beat Wall Street expectations for its fiscal Q2 (May-July), with revenues up 117% to $67 million. Perhaps more importantly, operating cash flow turned positive, although it was still down from a year ago.
RBR-TVBR observation: Much better than the Q1 results. Content acquisition, which is what Pandora calls its music royalties, were $33.7 million. That took more than 57% of the revenues coming in. Would you want to be in that business?
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Post-AOL, CBS’s Radio.com goes DIY and will add 50 internet-only music stations next month. As part of a major expansion of its streaming audio platform, CBS Radio’s Interactive Music Group will add 50 new internet-only radio stations to Radio.com in September. That’s the same month that AOL Radio will migrate its roughly 250 internet radio channels from CBS to pureplay Slacker, ending a three-year partnership with the broadcaster. The new CBS stations will cover multiple genres, including pop, rock, R&B, hip-hop, jazz, country, blues, alternative, new age, reggae, dance, Christian, gospel, Latin and classic hits, the company says. In an email solicitation to record labels for music service for the new channels, CBS says, “Several of our stations will be uncensored, so please make sure we have the unedited versions!” The company has been hinting about a major ramp-up of it streaming platform. It ported over personalization capabilities from Last.fm to its Radio.com player in June. And it’s been working for over a year on a realignment strategy to more closely integrate Radio.com, Last.fm and MP3.com, the three pieces that comprise the Interactive Music Group’s digital music portfolio.
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The latest release posted on Pandora’s investors’ website is another attempt to position Pandora as something it isn’t – a radio station. I understand their radio envy – they even refer to themselves as WPAN — since Pandora is essentially a playlist maker set to shuffle. But what we took away from their announcement was its failure to reach half the country, fuzzy math, and no benefit for advertisers. So when it comes to Pandora comparing itself to broadcast radio, it just doesn’t WPAN out.
Pandora’s release centered around its having a strong presence in the top ten markets. But if the Pandora numbers are valid, then Pandora is essentially announcing that about half or more of its total listenership is restricted to the top ten markets in the U.S. Considering the top ten markets account for only about 25% of the U.S. 18-49 population, that leads us to the conclusion that Pandora is not being embraced outside these ten markets.
On the numbers front, Pandora is making claims based on what I’ll call “Pandora’s ‘Special’ Math.” The company hired well-respected Edison Research to create “average quarter hour” (AQH) ratings for “Pandora Corporate” (as they are listed by Triton Digital) within two age segments in 10 markets in the U.S. We aren’t challenging Edison’s math – they’re only crunching the data Pandora gave them. But we do wonder about all the data that seems to be missing. Like the geographic parameters of their ratings. In order to use the only accredited ratings available, the numbers must be reported in terms of TV geographic definitions (or DMA). If so, that would inflate their ratings when compared to the smaller Arbitron radio metro area. Therefore, they cannot be making an apples-to-apples comparison. In addition, we’re missing a statistic that’s critical for any real radio station — the weekly cume of their listening. As to why that was left out, we’ve pointed out before that the average Pandora listener tunes in just 2.5 times a week – clearly there’s not much of a cume to be generated by that.
Another example of Pandora’s ‘Special’ Math: In its initial analysts’ call, Pandora claimed that it “ended 2010 with 2.3 percent market share of all radio listening in the United States. Six months later, Pandora has increased its market share to 3.6 percent.” But anyone who looked at the numbers would see this was a mathematical impossibility. Triton Digital’s published ratings show a net increase of 6% in users for Pandora over that six month period. For Pandora to equal 3.6% of all broadcast listening, broadcast radio listening would have had to drop by a third — 32.5% — in that same period. But it didn’t — In fact, broadcast radio listening remained consistent over that timeframe and, in the top ten markets Pandora targets, radio’s AQH has increased by 3.1%. And calculations by the two actual ratings sources for radio put all digital listening at about 3% of total radio listening. Without Pandora’s ‘Special’ Math, Pandora would account for possibly 1-1/2% of all radio listening.
As we’ve said before, Pandora is not the ideal vehicle for advertisers. Let’s look at ad targeting – which is crucial when a buyer is considering which radio stations to include on a buy against 18-49 year olds. Broadcast radio offers targeted environments where advertisers’ messages will have relevance and meaning. A rating without an environment is meaningless. Pandora doesn’t offer an environment, period, let alone a targeted one. So, for example, if the advertisement is for a Closed Circuit Boxing match, the spot could easily be surrounded by ballads from Celine Dion. Not what that advertiser signed up for, I bet.
Knowing radio’s place in the hearts, minds and daily lives of hundreds of millions of listeners every month, we don’t blame Pandora for wanting to be a radio station. But as the data continues to bear out, it’s far from succeeding in making that case.
P.S., Of course I have the data to support everything I’ve said here, and I’d be glad to share it.
May Beth Garber
EVP/Radio Analysis and Insights
Katz Radio Group
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In his new role as Chairman of Media and Entertainment Platforms for Clear Channel Communications, Bob Pittman appeared Wednesday as a featured speaker at a Credit Suisse Investor Conference in Miami. He gave attendees an earful about why he invested $5 million in Clear Channel and on why radio is not going away.
“Radio is still America’s companion,” Pittman said, “you can’t live without it.” But that was just a little part of the cheerleading warm-up. Then he got down to dealing with what’s supposed to be the latest threat to radio.
“Radio is quite different than playlists or music lockers. Typically people have had their radio they love and they’ve had their music collection. Things haven’t changed. They still have a music collection and they have the radio stations. One is programmed for them, one is where I program stuff myself and look through it and play it and have specific interests,” Pittman explained.
“What makes radio different than custom radio – a Pandora-like service, playlist, or music locker, Spotify, etc. – is that radio’s curated and dynamically changes. What that means is we have to do an enormous amount of research every week to understand who that tribe is we’re programming to and what their tastes are. And guess what – those tastes change every week,” said the new Clear Channel executive, who knows a lot about music not just from his days as a radio programmer, but also from being “The Father of MTV.” “So as you’re getting tired of a certain song, it begins to disappear. As you discover a new song, miraculously it appears and starts being played more and more. And every week, every month, every year the station is constantly changing in reaction to changing consumer tastes.”
And then here are the human beings. Pittman noted that when MTV started he and the other executives had to decide whether to have people as hosts, or just play the music videos. The decision was made that people were needed, and that proved to be a correct choice because viewers bonded with the VJs (video jocks) who became the faces of MTV. Likewise, radio hosts are companions as people drive along and stations have strong local brands which are identifiable to their audiences.
Pittman doesn’t totally discount “jukebox radio,” noting that Clear Channel has done a deal with Thumbplay to add the music service to its iheartradio Internet-based streaming operation.
But services like Pandora, he said, are not radio. “What you’re really looking at is a playlist.” Pittman asked attendees if they’d all made their own playlists when they first got an iPod. “Remember how great it was for a while, but over time you got sick of listening to your own playlist. It burns out. That’s exactly what happens here, because what you’re going to find with Pandora, or even with our service as well, it’s a shortcut to create a playlist. You’re putting in a song. It creates a playlist. It’s a benefit – I’m not knocking it – it’s good, but it ain’t radio. You create a playlist and then the songs are put on constant shuffle, to use the iPod analogy, but it constantly shuffles songs that are the same group of songs. And if your tastes change or you get tired of that new Lady Gaga song, it’s still there. And if a new song appears, guess what, it doesn’t show up there. So what you do is you go create another playlist – and another one,” he said.
Pittman noted two studies which found the same thing – the longer someone listens to Pandora, the less they like it. Radio, unlike jukebox services, introduces new songs, has personalities to bond with and delivers local content. Personalities do make a difference, he said, noting that Clear Channel wouldn’t have paid Ryan Seacrest $60 million if it didn’t need to.
RBR-TVBR observation: We’ve long considered Bob Pittman to be one of the smartest guys in media, even if he is now an exec of the company which owns one of our competitors, Inside Radio.
He saw the potential of music videos on cable when most people didn’t, the media value of the Internet when it was still new – and now he’s back to touting the value of radio when the supposed cutting edge view is that it is long past its prime.
If you somehow missed our extensive RBR-TVBR interview with Pittman before he took his new job, it is worth your time to listen.
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You may have read uninformed commentary elsewhere that Pandora Media’s IPO may not be busted because the stock price could still rally back to the IPO price. Sorry folks, it doesn’t work that way.
There’s no official definition of a busted or broken IPO, since the big investment banks don’t want to think about their bad deals. The rule of thumb, though, is that an IPO is broken if it closes below the IPO price anytime within a month of the offering. Pandora Media has now done so twice in three days of trading.
A late rally on Friday made Pandora’s performance positive for the day. It closed at $13.40 - up 14 cents for the day but still well below the $16.00 IPO price. The stock has now traded in a range of $12.16-26.00 in three days of trading, with the only close above the IPO price coming on Wednesday (6/15) at $17.42.
Pandora now has official coverage by a second Wall Street analyst. Richard Greenfield of BTIG Research, who had been a critic of the IPO, has initiated the stock with a “sell” rating and a target price of $5.50. That’s actually up from his pre-IPO estimate of $4-5 as the real value of the stock.
The analyst sees Pandora turning profitable in 2014 after a few more years of red ink. He points out the obvious problems with the business model: “While Pandora is creating a large active user base, its reach/frequency continues to pale in comparison to terrestrial radio, as does its profitability. Pandora’s fundamental problem is that active users and listening hours are growing rapidly, but those listener hours have fixed (and annually escalating) royalty costs per streaming hour (fees to music labels).”
Greenfield joins John Tinker of Maxim Group in covering the stock. They have somewhat differing views of the company’s worth. Tinker rates Pandora a “buy” with a target price of $23.
That’s a huge spread, of course, from $5.50 to $23.00. For now, the stock price is hovering around $13 – kind of in the middle. The coming week will tell whether Pandora can hold onto a double digit stock price or start sliding toward penny stock territory (anything below $5).
RBR-TVBR observation: At this point it may be optimistic to project that Pandora will be able to post a net profit in 2014. You first have to post an operating profit before you can think about getting to a net profit.
RBR-TVBR seems to be the only one to notice that Pandora’s operating (negative) cash flow moved the wrong way – and big time – in fiscal Q1 after improving last year.
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Kathy Jones on her 50 calibre machine gun.
"B-17’s Rule the Sky", she later stated to the Press with a ever-so-pleasant smile.