Unpacking Pandora's (Q2 Earnings Report) Box
-- Pandora Media will report its first quarterly earnings since its IPO at 5pm ET Thursday. Close scrutiny is both likely and understandable - Pandora is a bellwether of the Internet radio market and one of the few publicly traded, pure-play music companies. Some media coverage is likely to highlight the company's net profit or net loss, but there are more important things to watch for.
1. Revenue growth. Year-over-year revenue growth was 149% in fiscal 2010 (the year ended January 31) and 136% in the first fiscal quarter (the period ended April 30). The company needs to continue on that trajectory. User growth is still strong (see #3 below), and revenue needs to climb along with it. Analysts are estimating fiscal Q2 revenue in the range of $60 million to $61 million, according to Barron's.
2. Advertising mix. When a company pays a per-stream royalty, revenue needs to keep up with the number of streams. Mobile is a key to Pandora's future but mobile ad spending gets less than 1% of U.S. advertising spending (an IDG statistic mentioned in Pandora's SEC filings). How will Pandora grow mobile revenue? Will it offer location-based advertising? Will it incorporate daily deals of some sort? Analysts, investors and other interested parties don't have much insight into the company's mobile trajectory. The earnings call could shed some helpful light on the subject.
3. User growth. There are two parts here: users and listening hours. As of July 12, Pandora had 36 million active users and 100 million registered users (up from 34 million active and 94 registered on April 30). Listening hours grew to 1.6 billion last quarter, a 129% increase over the prior-year period. That figure needs to be around 1.7 billion or 1.8 billion in fiscal Q2. Pandora's promise will be realized if it can substantially erode broadcast radio's share of listening hours. Some of that erosion will come from automobiles in later years, but some of it must come from PC and mobile users right now.
There are other aspects of the company's performance that aren't as important right now. Net profit or loss is secondary to gaining users and market share - it will be far more important in a year or two. The same goes for operating income. Marketing and sales expense will represent a larger share of revenue today than in future years (a higher marketing expense means a lower operating income). Finally, Pandora's content acquisition costs (a.k.a. royalties expense) will always be under the microscope. But those costs, as a function of listener hours, won't change from one quarter to another. The rates increase each year and should be watched over the long term. And as a percent of revenue, royalties probably won't change much this year, either.
Picking the Dark Horse: Blackberry Music Vs. Myspace
-- Which is more likely to succeed: BlackBerry's upcoming music service or the revamped Myspace? At first blush you might say MySpace has a better chance. News of BlackBerry's music service has attracted some guffaws in the press, and the company has never been known as the device of choice for serious music fans.
But Blackberry is following an important rule of thumb that exists in digital music: Any product deemed an "iTunes killer" by its creator or the media is probably going to fail. Instead of taking on iTunes or Spotify directly, BlackBerry is putting a different spin on a familiar concept. Five dollars a month for 50 songs that can be shared with friends via the nifty BlackBerry Messenger service? At least it's original.
The new plan for MySpace, on the other hand, is anything but original. In fact, the company's new owners, Specific Media, now want to take on iTunes, Spotify and Vevo, according to a report at AdAge.com. Specific will turn MySpace into a major music portal fueled by partnerships with consumer product brands and driven by the involvement of celebrities.
Companies are wise to operate in their own space in a marketplace. Imagine the digital music market as an X-Y grid. iTunes and other download stores occupy a specific area on the grid. There's a lot of activity on that spot, but iTunes is dominant, Amazon is formidable and the whole download market is too mature to support many new entrants. Or imagine a direct-to-fan platform that allows artists to sell music and merchandise to fans. If that company wants to offer a digital distribution service to its customers, it will have to join TuneCore and the handful of other companies that have already staked out a place on that point in the grid - and they probably perform that service better.
Not every digital music service need take on its competitors directly. Spotify is a great example. It has been called an iTunes killer in the press, but that's not how the company either sees itself or markets itself. On the grid representing digital music services, Spotify is nowhere near iTunes and the other download stores. In fact, by integrating locally stored music files with cloud-based collections, Spotify has become complementary to iTunes while being an access-based, subscription service.
There's another rule of thumb, this one for business in general: pick on thing, do it very well and then move on. It's good advice for a company that wants to do three things at once and take on three major competitors at once. MySpace needs to become great at least one thing before it can succeed by being average at a handful of things.
There is one reason Specific could do just fine with MySpace - it paid only $35 million for the entire company.
How Ticketmaster Is Making Ticket Buying More Social
-- Ticketmaster latest social feature combines its interactive seat maps with Facebook. Now Ticketmaster customers can elect to share with their seat location either their Facebook friends or all of Facebook. That means a potential customer can choose their seats based on where their friends are sitting (or where they're not sitting).
This feature is the latest example of how Ticketmaster is making its product more social. Back in November, the company added a feature to Ticketmaster.com and LiveNation.com that allows consumers to see which of their Facebook friends have RSVP's for a particular event. "Seventy-five percent of our traffic on Ticketmaster.com uses Facebook and we've seen great results with fans sharing their likes, recommendations and the events they are attending with their Facebook friends," writes Kip Levin, EVP Commerce at the Ticketmaster blog.
Turntable.fm's Downward Trend
-- Is Turntable.fm's popularity continuing to fall? According to statistics available at AppAnnie.com, the social music site's monthly average users (MAU) has dropped to 293,000 from about 400,000 on July 25. The site's all-time high MAU is 420,000. It's worth noting that AppAnnie's figure is quite higher than the 207,000 unique visitors tracked by comScore for the entire month of July. Regardless of the starting point, AppAnnie clearly shows a downward trend.