Pandora posted solid revenue gains in 2015 but wasn’t able to find new listeners. A new subscription service, currently pegged for a late 2016 release, would add more revenue and possibly more listeners while countering attacks by Spotify and Apple Music.
Full-year revenue for 2015 was $1.16 billion, up 26 percent from 2014 and slightly above the guidance of $1.153 billion to $1.158 billion Pandora gave three months ago. Net loss was $169.7 million. Its bottom line took hits from one-time charges related to legal settlements and content licensing.
Fourth quarter revenue of $336.2 million, up 25 percent, slightly exceed guidance of $325 million to $330 million. Ticketfly, acquired in October, had revenue of $10.2 million in the quarter. The fourth-quarter loss was $19.4 million, a roughly $37 million swing from the prior-year period’s $12.3 million net income.
Listening metrics showed scant improvement. Listening hours grew 3 percent to 5.37 billion for the fourth quarter and 5 percent to 21.1 billion for the full year. Some of the listening hours lost to Apple Music appeared to return. After falling in the third quarter — the period of free Apple Music trials in the United States — fourth-quarter listeners and listener hours grew 4.5 percent and 3.9 percent from the third quarter.
The alarming listening metric was the slight contraction in the number of monthly active users. The fourth quarter, year-over-year decline in the number of listeners was 0.5 percent to 81.1 million.
Yet the average listener spent more time with Pandora. Average listening time was 22.1 hours in the fourth quarter, up from 21.3 hours in the prior-year period. The number has fluctuated over the years, however, reaching a high of 22.7 hours in March 2014 (at the time, listening metrics were reported monthly rather than quarterly) and surpassing 21 hours in each of the last 7 quarters.
In spite of stagnant listening hours, revenue was able to grow due to increased RPMs, or revenue per 1,000 listening hours. RPMs were $54.65 in full year 2015 compared to $45.26 in 2014.
Additional listening meant more royalties in 2015. Content costs covering royalties for both recordings and publishing rights, grew 36.7 percent to $610.4 million. Royalties accounted for 52.4 percent of revenue in 2015, up from 48.5 percent in 2014.
Royalties’ share of revenue is likely to increase this year after Pandora signed direct deals for publishing rights and new, higher rates for record labels and performing artists. CFO Mike Herring said Pandora’s content costs are expected to increase $140 million this year and licensing costs per 1,000 hours, or LPMs, will increase to $32 this year from $25 in 2015.
Don’t expect listening metrics to change much in 2016. McAndrews said the company doesn’t expect “significant growth” in monthly listeners this year due to competitive services and their spending to acquire customers. But improvements can be made in engagement, or time spent listening, and some new efforts are underway. One example is Thumbprint Radio, a new feature that’s effectively a station filled with the songs a listener likes most. CEO Brian McAndrews said the feature has resulted in an incremental 60 minutes per listener. Another tool to attract and retain listeners is the hit podcast Serial, for which Pandora is the exclusive streaming host. McAndrews said over 5 million Pandora listeners have added Serial to date.
Its most significant project is an on-demand service. It will be a costly undertaking. Pandora expects to spend $120 million — covering engineering, technical resources, and back office teams for rights management and other functions — to deliver a product with features Pandora doesn’t have today. It does not yet have the required licenses but Herring believes a launch in either the late third quarter or fourth quarter is possible.
Expectations for the subscription service are modest but still aggressive. Pandora believes it can build a subscription service into a $1.3 billion product with a 10 percent conversion rate (free to paying) worth “tens of millions” of customers. (It would require $10 per month from 10.8 million subscribers to generate $1.3 billion annually. As a point of reference, Spotify had revenue of $1.22 billion in 2014.)
Aside from the free radio product, something else could help Pandora gain subscribers: the $450 million Ticketfly acquisition. Herring explained that unifying user IDs across the two services will give Pandora users one-click ticket purchases and, vice versa, give Ticketfly customers one-click purchases of the subscription service.