BTIG Research doesn’t expect Pandora to have the earnings to justify the valuation it’s going public with.
It’s just published a report that lays out the risks related to Pandora and they’re pretty much all very real:
- Pandora is increasingly mobile, which is great for usage, not so great for ad rates. CPMs (cost per thousand impressions, the most common way to price ads) are much lower on mobile than on PC. Mobile is great to grow Pandora’s userbase, but it means it will make less money from each marginal user.
- It’s unlikely Pandora will be able to make a bunch of money on ads anyway. The opportunity for Pandora is to grab a pie of the $13 billion radio advertising market. But, says BTIG, that’s unlikely. First of all, while Pandora now carries fewer ads per hour than traditional radio, its userbase will probably rebel (and competitors lure them) if they increase that too much. More importantly, most radio ads are local ads, and Pandora would need a huge local sales force to grab a share of that pie, and it doesn’t have that. And, “Terrestrial radio broadcasters also have the ability to leverage local personalities who have a relationship with their audience and who can create more of an event out of local ads (give-aways, studio events, broadcasting from an event, etc…).”
- Of course, content costs are eating Pandora alive. 50% of Pandora’s revenue goes right back out the doors to public labels. That’s not a way to build a healthy business. It’s interesting, however, that BTIG cited this last. This is the problem that’s talked about the most when discussing Pandora, but the other factors seem just as bad.
BTIG does mention the “bull case” for Pandora, which is that as it gets into an increasing number of devices, and particularly car dashboards, it can “replace” traditional radio and the huge market that comes with that. But, says BTIG, that case is an “if”, and the price Pandora is going public just doesn’t justify taking that risk.
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