One may think that Pandora’s popularity would directly correlate to success on Wall Street; contrary to this belief, its revenue model fell short of public expectations when the service went public in 2011. Starting out with an initial public offering (IPO) price of $16, the stock is currently trading at $10.21, a 36 percent decrease after a 24 percent drop in their most recent fourth quarter.
Initially, Pandora faced high expectations due to its large user base, and its stock was expected to soar. What wasn’t considered was that there is more to profitable Internet and mobile companies than a loyal user base. Pandora exemplifies the struggles of companies who are in industry with a low barrier of entry and rely on ad-generated revenue.
Pandora’s revenue problems stemmed from their accelerated growth on their mobile platform, where monetization is, in fact, less than traditional broadcast stations. Given that they received $20 per 1,000 user listening hours from their mobile platform, as opposed to $63.10 per 1,000 user listening hours on their desktop platform, there is a lot of room for improvement when it comes to generating ad revenue. Together, both platforms combine for an overall monetization rate of $35 per 1,000 user listening hours.
Another issue Pandora is facing is their potential loss in market share in the personalized music industry. With iHeartRadio service, and Spotify actively taking market share away from Pandora, consumer listening hours may face a drop in the near future. With already-low monetization rates on the mobile platform, with increasing royalty rates, Pandora may be running out of time to capitalize on their large consumer base.
Although Pandora has been an innovative Internet startup since 2000, they need to take active steps to continue to innovate to regain market share as well as modify their business strategy. In order to make the profits analysts were expecting in the fourth quarter, the brand needs to take a more aggressive approach in placing ads on their mobile platform in order to take advantage of their large user base. Currently Forbes is predicting a further drop in the stock to reach a low of $7.90; however, with a further increase in company revenue can lead to a different outcome. Forbes simplifies the success of Pandora into two potential scenarios.
Given the expansion into the automobile segment, additional content being created, and international expansion, there most likely will be an increased growth rate of Pandora users. WIth an increase in users, advertisement revenue has potential to increase since Pandora will have a large variety of advertising options which may lead to more interaction on ads found on Pandora’s mobile applications. A significant increase in these two factors will cause the price of the Pandora stock to rise.
On the contrary there is a chance that Pandora’s user base reaches an apex this year due to Pandora not being able to offer its services internationally, a result of potential music licensing restrictions. Along with limitations to growth, if Pandora faces significantly higher royalties, it could offset their planned increase in ad revenue. These factors would lead to a further decline in the already struggling stock price.
Pandora is a reflection of the larger industry issues that originates from the low barrier to entry. With relative ease to enter into the customized music industry, and an increase in proficient easy to use applications, the question that arises is will any company reach its full potential, or should the expected level of success be downgraded. With the ad network industry becoming pivotal for success, finding the balance for advertising on applications without drastically changing user experience becomes key.