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TheStreet Open House

Pandora Just Killed Itself

Stocks in this article: PAAPLSIRI

NEW YORK ( TheStreet) -- Pandora (P) stock took another beating Monday, closing down almost 8% to $31.39. Although the stock is still up 18% year to date, shares have plummeted 22% since Pandora hit an intraday high of $40.44 on March 5. And things just may be getting worse.

Aside from the news that Apple (AAPL) is reportedly in talks to bring National Public Radio to its competing iTunes Radio service, Pandora is now feeling the stress of high royalty payments that it must pay to artists. This is a result of its inability to monetize its traffic, even though the company commands close to 7% of the radio listening market.

Pandora's music genome platform allows listeners to customize their music and has turned Pandora into a sticky service. The company has growth despite stiff competition from Spotify and Sirius XM (SIRI). But its popularity is a double-edged sword. The more listeners Pandora attracts, the more it money it must pay to play the music.

Royalty fees have eaten up a significant portion of potential profit Pandora, and these fees are expected to grow by an additional 9% next year. (Rates are up by 53% in the last 5 years.) Accordingly, Pandora's margins have been nowhere to be found, and management has had enough.

Looking to beef up the bottom line, the company has opted to raise the rate of its premium Pandora One platform. With Apple's possible entry into non-music content, now doesn't seem like the best time for Pandora to "turn up the volume" on its customers.

It's not just your standard increase. Pandora is jacking prices by 25%.

The price of Pandora One is going from $3.99 per month to $4.99 for new subscribers starting in May. The company said yearly subscribers will get a "discounted loyalty price" of $3.99 per month at renewal time, while current monthly subscribers will see no price changes.

Bulls will argue that Pandora has not raised rates for some time. This may be true. But what's fair is sometimes at the company's own peril. As it stands, this price hike now placed Pandora One at 99 cents higher than what Sirius charges for its receiver-based streaming service.

Plus, there's the risk of Pandora losing its stickiness factor. There were those who were unwilling to switch from Pandora to iTunes Radio. Pandora just might have given its listeners, many of whom are disparaged as "freeloaders," a reason to test the alternatives.

The company has just over 3 million (out of 75.3 million active listeners) subscribers to Pandora One; the rate hike doesn't seem like a good wager. What does management stand to gain?

It's been almost a year since Pandora instituted a 40-hour listening monthly limit on anyone listening for free via mobile device. Pandora said this was a way to better control its royalty payments, even though the policy was thought to impact fewer than 4% of its active listeners.

Something is wrong with this business model. And given that content acquisition costs continue to rise, it's only a matter of time before the music stops. And I wouldn't want to be long the stock when it happens. Cue the sad songs.

At the time of publication, the author was long AAPL and held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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