Pandora shares reached their highest mark in over two years when they peaked at $21.00 on Tuesday. The company’s shares have not been that high since they hit $21.20 on July 1, 2011. The all-time high was $26 on the first day of trading, June 15, 2011.
The shares’ gain is a positive sign for the music business. It’s not that Pandora is suddenly turning a profit — it still posts a net loss rather than a new profit. But the gain in share price reflects the fact that certain elements important to the music industry’s future — mobile growth, the maturing of mobile advertising and adoption of digital services — are falling into place.
The “wisdom of the crowd” — the opinions of analysts and investors — says the business model appears to be working. The rise in Pandora’s share price reflects the fact the company has taken measured steps that should lead to profitability. Pandora has created a product used by over 71 million people every month. It has built a large ad sales team. Its audience data, compiled by Triton Digital, is now integrated into the most common ad-buying platforms, STRATA and Mediaocean. And the company is improving the way it monetizes listening on mobile devices.
A successful Pandora would be meaningful to the music business as a whole. Here are three reasons why:
1. Digital music isn’t entirely a fool’s errand. The high costs and low margins of digital music certainly have their critics. Pandora itself is attempting to lower its royalties as a percent of revenue (royalties accounted for 66% of revenue in the quarter ended April 30th). Perhaps less onerous licensing terms would attract more companies. But the digital music landscape will always be littered with the corpses of failed ventures. There will be a handful of winners — big winners — who achieve enough scale to make a tough business model work.
2. Success by one company grows the market and attracts new competitors. Apple’s upcoming entry into the Internet radio market could be viewed as a threat to Pandora and other services. But in a larger sense, iTunes Radio confirms the potential of the Internet radio market. As a result, advertisers may have improved opinions on Internet radio and shift to it a greater share of their ad budget. The subscription market could see something similar. The closer Spotify and another subscription services get to the mainstream, the more likely large companies like Apple will be to enter the market.
3. A shift away broadcast radio listening is good for labels and artists. They may miss the promotional punch delivered by broadcast radio, but artists and labels don’t get paid for play on broadcast radio. Internet radio, and subscription services’ radio features, pay artists and labels when people listen. Thus, labels and artists are better off when listening is shifted from broadcast radio to digital platforms. (There’s a bit of nuance here because broadcast and Internet radio are interconnected. Internet radio may not be fully embraced by broadcast radio until they pay lower streaming royalties. Lower streaming royalties could be the result of an agreement to pay for plays on broadcast radio.)
Digital music is a tough business. There will be far more losers than winners, but the winners will set the stage for future winners and help shape the future of the music business. Pandora shares, which closed at $19.85 on Thursday, suggest the company will be one of those few winners.