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The bear case on the future forecast of Pandora (P)

Posted on May 24, 2013 by Chi Ip

Pandora (P) released better than expected earnings this week to the delight of investors. However the future forecast may not be as bright. There are a lot of elements that have to be taken into consideration for a proper analysis of Pandora (P).

Of these are an analysis of the customer base that is most likely to subscribe to paid music services. Pandora can at best be described as a service for casual music listeners. They set the playlist to an artist they like but then don’t necessarily care too much about what comes out. The sheer number of Pandora subscribers support this claim (at over 200 million). But the question is who really will pay for the service, the answer is not the casual listener. This can be further substantiated by slowing sequential revenue growth quarter by quarter.

It’s true there is some potential in the automobile sector for further revenue to be squeezed out but this has been done in the past by Sirius/XM, which is essentially the same product. The only difference is in the latter, the stations are pre-specified for you by genre and not as fine tuned as a specific Artist/Song.

So where will the paying music subscriber go? They will go to services that will allow you to create your own playlists and play specific songs. This is where the real value of the impending digital era of music stems from. Services like Spotify and the new Google Service is a direct substitute for the Record/Singles industry, which was a healthy 14 billion dollar a year industry until the rise of Napster and the digital era.

Pandora is a substitute (albeit a much better substitute) for the Radio industry- but value generated by the conventional radio industry is more valuable due it being finely tuned to the user demographic. Pandora revenue will be hard to squeeze out of advertisers due to the millions of possible radio combinations. Advertisers will soon lower the clip at which they are willing to pay for airtime as they see lower and lower return on investment.

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