Is Pandora tuning in for a sale?

Profile picture for user slauchlan By Stuart Lauchlan February 11, 2016
Summary:
Is Pandora readying itself for a sale? CEO Brian McAndrews isn't being drawn on the subject, choosing to focus on big plans for the firm instead.

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Brian McAndrews

Is online music streaming giant Pandora up for sale? That’s the scuttlebutt in the music industry following a New York Times story that the firm has engaged Morgan Stanley to hook it up with potential buyers.

It’s a story that CEO Brian McAndrews was keen to distance himself from yesterday, stating:

It’s just not something we are focused on. We are focused on working as an independent company and driving our business. We are a public company and all that that entails.

So that's far from being an outright ‘no’, even if it’s not exactly confirmation either.

Whatever the reality is, the rumors caused Pandora’s share price to spike prior to the release of mixed Q415 financials.  The firm turned in a net loss of $19.4 million on revenues of $336.2 million, up 25% year-on-year. 

Crucially, advertising revenues were up 22% year-on-year, but active users are down from 81.5 million last year to 81.1 million this year. That’s hardly a 'scare-the-horses' tumble, but it may be indicative of the increased levels of competition in the sector.

Spotify’s latest numbers boasted 75 million active users, up 25 million in the previous six months, while Apple Music said last month that it had scored 10 million paying customers in its first six months.

McAndrews is bullish about the competition of course:

Over the years, we have seen more than 30 imitators and so-called Pandora-killers. And yet, Pandora has thrived where others have not, becoming the mobile service with the highest engagement across the consumer internet. And that's precisely because we've built so much expertise and technology over more than a decade, dedicated to delivering precisely the song listeners want to hear at the right time. And rest assured, this relentless focus will guide our expanded offerings in the future.

McAndrews focuses on the potential for growth for Pandora:

from today's roughly $45 billion US radio and digital advertising market, to a much larger $200 billion global music marketplace. Simply put, it is a generational opportunity to drive the future of music for years, if not decades, to come.

He predicts that Pandora can build a $1.3 billion subscription business over five years, which he characterises as being conservatively based on 10% conversion of the existing US audience. If he’s correct, that would take Pandora to a $4 billion-plus revenue business in the domestic US market within five years.

MacAndrews adds that the foundation is there to achieve this:

We are at an all-time high of more than 10% share of US radio listening. We reach more than 80 million active users and engagement continues to grow, now at approximately 22 hours a month per user, the highest of any US mobile application and more than double the next closest music service. And our footprint extends over a 100 million mobile phones, over 1,700 consumer electronic devices and into more than 190 car models through native in-dash integrations. With the opportunity to double hours by achieving our fair share of listening in the car alone, it bodes extremely well for Pandora as the connected car becomes more and more of a reality in the coming years.

There are other monetisation opportunities on offer, he argues, such as data exploitation:

Because we've amassed billions of hours of listening across well over 100 million cumulative users during 2015 alone, we've built a data set that is invaluable to delivering our listener and advertiser value proposition, and will be increasingly essential for music makers. This data will fuel new services and commerce on our platform, and create new revenue streams for Pandora, spanning live events, subscriptions, and other opportunities. The potential additional applications of our data are just beginning to be realized.

As an example, he cites the partnership with Ticketfly:

In 2015, we definitively proved Pandora can drive significant ticket sales by leveraging our personalization, data and scale. Today, 40% of all live music tickets go unsold, and that's primarily because fans don't know their favorite artist is playing.

So imagine what our marketplace can do when we apply Pandora's existing core strengths to Ticketfly's fast-growing business. Pandora will dramatically increase tickets sales, drive substantially more transaction volume across Ticketfly's platform, and strengthen Ticketfly's position as the partner of choice for new and prospective clients.

We will continue to optimize our data to accelerate ticketing growth, combining that with our opportunity in live event sponsorship, and our powerful existing sales resources, we see a $300 million-plus revenue opportunity in the next five years.

My take

Those are very ambitious goals set out by McAndrews in a market sector that’s becoming increasingly competitive. Against that backdrop, the idea that Pandora might be considering its options is pragmatic. But of course, just because conversations might by underway is no guarantee that they’ll be come to any conclusion.