Here's The Big Problem At Pandora

Thursday was a busy day for Pandora. The company’s CEO Joe Kennedy surprisingly announced his resignation before reporting decent results for the fourth quarter of fiscal year 2013 (Pandora’s fiscal year ends January 31).

The popular internet radio continued to grow healthily in the past three months, but failed to turn a profit. Pandora has 65 million active users and total listening hours increased 52 percent over last year’s fourth quarter. The company now accounts for 77 percent of online radio listening and 8 percent of total radio listening in the United States. Revenue grew 54 percent year over year to $125 million, of which an impressive $80 million or 64 percent came from mobile usage.

The main problem with Pandora’s business remains the ever-growing cost of royalties and licensing fees. In the fourth quarter, content acquisition costs grew 59 percent, eating up more than 60 percent of the company’s revenue. After the Internet Radio Fairness Act (IRFA), which would have lowered licensing fees for internet radio services in the United States, didn’t get passed by the 112^th United States Congress, Pandora recently reintroduced a 40-hour listening cap for mobile users with free accounts in order to limit escalating royalty costs.

The chart above illustrates the unhealthy relationship between Pandora’s revenue growth and the growth of its royalty costs.

It will be interesting to see if the new listening cap will help to limit costs without hurting revenue growth.

Source: Statista

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