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.
Post with 10 notes
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