Pandora Media’s IPO: Pricing too high?

20/06/2011

By: Danny Meadows-Klue

Internet radio network Pandora helped define social music online. Using the Amazon model of ‘people who like this also like this’, Pandora build a global audience franchise. But while Shazam stole the crowds in clubs, and iTunes captured the downloads markets, Danny Meadows-Klue argues that Pandora’s growth lacks the scalability of a smart internet business model. That’s why $16 a share feels like investors are paying over the odds…

Valuing internet companies may look like a roulette game, but behind the scenes their earnings multiples need to stack up. Whether Linked-In or Google, there needs to be a clear plan for how those massive global economies of scale will arrive, and while many online media businesses have this, Pandora has one fundamental weakness. In its business model, there is no stepchange in profitability.

Pandora is advertising funded, and while in video and text media that is seen as a strong model, online radio is very different. In a world of music piracy and MP3 players, high prices for subscription content will not happen in the medium term; maybe never at all.

This leaves Pandora paying premium royalties for its music and haemorrhaging most of the profits they could make. As they gain more audiences they increase their costs. This linear growth in the cost base works against the fundamental economics that make advertising funded businesses - from Google downwards – so successful.

Pandora has two other challenges: advertising rates will rise at a pace that lags audiences, and the advertising volumes will always be limited. Put all these together and $16 a share starts to seem an uncomfortably high price. Pandora looks like a great media property from the outside, but not one worth $2bn. It’s a great tool, and the 90m audience will continue to rise, but profitability will look very different from the social content giants like YouTube and CNET.

Many investors seem to think they have bought a very different business. This could be more a victory for Pandora’s founders and the banks that masterminded the IPO, than for the investors who are chasing the next YouTube. And all this Spotify hits the US market. Unless there’s a secret strategic partnership waiting to unlock a step change in profitability, investors may find the future very different from the one they were just sold.

Danny helped manage some of the first large social media brands in North America, has run workshops for Shazam and was an early Pandora user. He has been coaching firms in digital marketing for over 15 years. More than 45,000 people have attended his talks and courses in over 30 countries. He set up and ran the UK and European IAB trade associations for almost 10 years, was the pioneering publisher of Telegraph.co.uk, held the Vice Presidency of NBC’s European internet business, and has been a government policy advisor in the UK. He is chairman of the Digital Training Academy that coaches marketing teams to improve their ROI and founder of the Digital Strategy Consulting practice that creates internet marketing strategies for brands. He is a Commissioner at the digital marketing regulator in the UK, and the publisher of Netimperative and Digital Intelligence. He now coaches management teams, helping them accelerate their businesses and transform their organizations. Contact him on Danny@DigitalStrategyConsulting.com or http://uk.linkedin.com/in/dannymeadowsklue


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