Pandora Earnings, Congress Still Listening

If you leave Pandora (P) playing music on your browser long enough, a prompt comes up asking “Are you still listening?” For each song, Pandora has to pay a royalty fee of $0.0011. An idle listener playing an average of 20 hours a month at a rate of 14 songs/hr. costs Pandora about 30 cents.

The Internet Radio Fairness Act recently reached congress with the aim of decreasing these costs. Internet radio has raised concerns that the current content fee structure is unfair, hence the name of the bill. The big claim is that Pandora currently pays 50% of its revenue as royalties. CEO Joe Kennedy of Pandora and other executives at the company have quoted the statistical comparisons. They are publicizing the fact that satellite radio providers, mainly Sirius XM Radio (SIRI), pay 7.5-8% of their revenue in royalties. Even cable radio pays only 15% for content.

The comparison, however, isn’t apples to apples. Radio listeners access the same content through satellite, cable, and internet radio. But these businesses are completely different and valuing them gets intricate. You might has well compare Pandora to Netflix or Comcast.

Monetizing Through Advertising

The majority of Pandora’s revenue stream is advertising, almost $160 mil in the first 6 months this year. Subscription revenue was a fraction of that at $22 mil. Pandora, mostly free, depends on listening hours (“inventory”) to sell ad space. These listening hours are directly tied to the variable cost in question, a flat fee per song played. In contract, Sirius derived 87.1% of its revenue from subscribers directly; its services include non-music programming with no commercials.

Pandora, like other digital companies, reworks traditional advertising. The Pandora platform creates the opportunity to target very specific demographics and tastes. A humorous example: A recording of the jazz song “Deep Purple” accompanies a scrolling advert for Nexium.

Content Costs

Broadcast media doesn’t have this capability and consequently, Sirius doesn’t pay royalties by listener. The inability to accurately reach consumers drives its commercial-free, subscription model. Of course, charging a subscription fee limits Sirius’ user base. Sirius acquired just over a million new subscribers in the first 6 months. 54 million visitors use Pandora in a month.

Pandora intuitively offers the more progressive, data-mineable model but advertisers move much more slowly since one ad campaign is no longer enough. The move to mobile platforms further complicates the ability to monetize listening hours. A quick look at the 50% of revenue content cost raises a red flag. Pandora pays per song means its high costs result from an inability to attract revenue as quickly as listening hours.

Business Section: Investing Ideas

At the end of the day, it’s still just radio. The end consumers (and maybe even some investors) see little difference and treat internet and broadcast radio as close substitutes.

When assessing the two companies, Sirius clearly generates the stronger, more predictable cash flows. But while Sirius is bottlenecked with auto sales, Pandora has virtually no limit to adding to its marketable inventory.

Pandora and Sirius could make an interesting pair trade, especially if you see one stock as supremely undervalued at the moment. Historically, P and SIRI have moved in opposite directions. Pandora has traded up over 5% towards its earnings release, despite operating at a loss, as the Internet Radio Fairness Act hits the congressional floor. Sirius, on the other hand, has taken a dive. The stock dropped 1.43% during the day despite steadily increasing its earnings over the last few years.


Compare the past year’s performance; ‘E’ marks earnings dates:


 Use the links to access more data about the companies in this article:

1. Pandora Media, Inc ( P, Earnings, Analysts, Financials): Operates as an Internet radio company in the United States. Market cap at $1.51B, most recent closing price at $8.96.




2. SIRIUS XM Radio Inc. ( SIRI, Earnings, Analysts, Financials): Provides satellite radio services in the United States and Canada. Market cap at $14.58B, most recent closing price at $2.80.





Written by Freda Ding


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