Pandora Crashes Back to Earth, But Why?
- After flying high on its opening day of public trading, Pandora Media came crashing back to earth on Thursday. Shares closed down 23.88% to $13.26, erasing $690 million in market value.
Pandora's IPO allowed it to sell six million shares at $16 while another 8.7 million shares were sold by existing shareholders. Shares opened Wednesday on the New York Stock Exchange at $20. They quickly rose to $26 before fading the rest of the day and closing at $17.42.
The sudden decline prompts questions about Wednesday's sudden increase. Were Wednesday's early buyers hoping to ride a wave of enthusiasm? Were they aware of the many red flags on the company's financial statements that have some analysts calling its stock overvalued? Were they seasoned investors who simply don't understand this corner of the digital music space? Did the relatively low number of available shares (it has 159 million outstanding) help drive up the price? Or were they Pandora fans who want to invest in a product they have loved over the years?
Pandora and the Cost of Content Myth
-- A constant red flag throw up was the company's cost of content. In short, people are incredibly sour on the fact that Pandora's royalties increase linearly - as songs played increase, royalties increase in lock-step.
But it's not as bad as the Wall Street Journal made it out to be when it argued, "Pandora is being crushed by royalties" (which was a translation of BTIG's analysis of the stock). After all, nobody would say that about iTunes Music Store and it pays out 70% in content costs to Pandora's roughly 50%.
Because royalties increase linearly, gross margin percentage may remain the same as revenue increases. But the important thing here is that gross margin dollars will grow as listening hours increase. So as the company does more with roughly the same level of resources, it will be better able to cover fixed costs. And eventually the increase in gross margin dollars will exceed the increase in variable costs. All this is just a long way of saying Pandora can become more efficient as it grows, and efficiency is the way around that linear royalty growth problem.
But it's all relative. Pandora could soon be profitable, but it may not be able to get costs under control enough to be a hugely valuable company. Compared to other Internet stocks that have had or could soon have IPOs - LinkedIn, Facebook - Pandora cannot simply add users without adding a commensurate level of costs.
( Wall Street Journal)
-- Now that Pandora has had its IPO, what should it do with the money? The bad advice of the day was given by paidContent: Pandora should use the $235 million raised from the IPO (which is actually more like $92 million after fees and expenses) to create an on-demand service.
Pandora is an Internet radio company. It pays webcaster royalty rates that - unlike on-demand services - do not require either a direct license or advances to rights holders. It has a great product that should not be tampered with any time soon. And it has over 80 million registered users - about 50 times the number of on-demand customers in the U.S. There's no reason to start having Spotify-envy or iCloud-envy just because a successful IPO put cash in its pockets. Pandora needs to remember what got it to this point: an Internet radio product that people absolutely love and is easy to use.
Thankfully, Pandora knows this. And it understands that more radio gets more listening hours than on-demand formats. Yesterday, founder Tim Westergren told Billboard.biz the company doesn't plan to change what it's been doing. "We operate in the radio bucket and we view the on-demand bucket to be complimentary to what we do. Historically, radio has represented 80% of listening time for music, with 20% on-demand. Whether its iTunes or Rhapsody or MOG or Spotify, all those service I think are fundamentally complementary."
( paidContent, Billboard.biz)
Pandora's Thursday Morning Quarterbacking: Increase Paid Subscribors
-- There have been some calls for Pandora to concentrate more on signing up more users of its paid, ad-free service. Rags Gupta, former COO at webcaster Live365 and now VP of business development at Brightcove, told Bloomberg that Pandora needs to focus on paid subscribers just as Live365 did. "That was a key part of our revenue stream [at Live365] and it is for Pandora. They've been growing that from 5% to 10% to 15%. It's a good trend."
Westergren also addresses this in the Q&A with Billboard.biz. He doesn't see the mix of free and paid users changing much and wants people to become paid users organically rather than be pushed into it. "Fundamentally we look at radio and say it's been free for decades, so we have to make this work principally as a free service."
( Washington Post)
Hubspot's Case For Companies Blogging
-- Here's a note of encouragement to companies that don't have blogs. HubSpot, which provides marketing software to small and medium-sized businesses, found that companies that blogged 20 times or more in a month saw the most return in terms of traffic and leads. In addition, HubSpot found that companies with over 400 indexed pages generated the most traffic and leads. Translation: use blogs to regularly communicate with potential clients and turn them into actual clients. It's good advice for artists, labels, publishers, startups, whatever. Give people a reason to discover you.
( HubSpot blog)
The French: Too Cool To Spread The (Spotify) Word
-- Here's an interesting note on work of mouth marketing. Spotify users in France are not as apt as users in other countries to tell their friends about the music services, said Jonathan Forster, General Manager of Europe & Global Vice President of Ad Sales at Spotify, at the Omnicom conference in London. "We were puzzled because we knew we had listeners that loved the service but they weren't sharing that with their friends. We did some interviews and it seems that the French are too cool to tell others."
( Silicon Valley Watcher)