Wall Street

Despite growing revenue more than 50% year-over-year, Pandora posts a loss in Q2

Thursday, August 30, 2012 - 12:05pm

Pandora earningsPandora's revenue and active user count both grew around 50% year-over-year in Q2 of fiscal 2013, while its mobile revenue nearly doubled. But that still wasn't enough to offset growing royalty costs, which amounted to nearly 60% of the company's revenue this quarter. To combat those high costs, Pandora has stepped up lobbying efforts for more manageable rates and is striving to -- as CEO Joe Kennedy said -- "disrupt the $16 billion radio advertising market."

The webcaster's revenue for Q2 of FY13 (the three months that ended July 31) reached $101.3 million -- up 51% year-over-year. Its mobile revenue in particular grew 86% year-over-year, reaching $59.2 million. "This quarter demonstrated that our mobile monetization strategies are working," said Kennedy.

Mobile represents around 58% of Pandora's total revenue, which accounting for 75% of usage. But Kennedy says they're "narrowing that gap... That ultimately is the key to getting the content acquisition costs down," he told Billboard (here).

Pandora accumulated 3.3 billion listener hours during the quarter, a growth of 80% year-over-year. The webcaster now has 54.9 million active users (up 48%). That growth in listening means higher royalty payments.

Pandora mobileDuring Q2 FY13, Pandora paid $60.5 million -- or just under 60% of its revenue -- in royalties to the music industry. That's up 79% year-ovear-year. Royalties have accounted for 63.9% of Pandora's revenue during the first half of the fiscal year, reports the New York Times.

All told, Pandora posted a net loss of $5.4 million for the quarter. That's the "sixth quarterly loss in two years," writes NYT, which also points out Pandora lost $3.2 million during this period last year. The problem, as always, are those royalty costs. Pandora is attacking the issue on two fronts.

First, the company "has already begun lobbying in Washington over its rates" in anticipation of new royalty rate proceedings, set to begin in 2014.

Second, "Pandora has been building up local advertising sales teams around the country, and also pushing to be included in ad networks that would put its service into direct competition with terrestrial radio stations," reports NYT (here).

"Salespeople are being deployed all over the country to compete with radio for advertising dollars," writes Radio Ink (here). "In 2011 Pandora had 427 people on the payroll. That number has increased to 589 employees with the bulk of the new hires (79%) in sales."

You can find Pandora's press release here.

Coady Diemar says royalty, scalability issues hamper AM/FM growth online

Wednesday, August 1, 2012 - 12:30pm

Investment banking group Coady Diemar Partners released a report today in which they suggest the prohibitive cost of streaming sound recording royalties, coupled with programming that doesn't translate well to the Internet, has led to radio's passive approach to pursuing an online audience.

A quick glance at Triton Webcast Metrics ratings (see a graph here) shows little positive growth for most terrestrial radio's online listening. The Coady Diemar report shows only 8 of 14 terrestrial broadcast companies posting online listening gains from May 2011-May 2012. The investment bankers suggest it's broadcasters' content (simulcasts with "8-12 minutes of commercial time" and lack of customization features) and "lack of scale" (it's not likely for most local radio stations to build Internet-sized audiences) that keep audience growth, and thus profitability, down.

Internet radio listening trends

Pandora, however, has used its advantages as a web-only service (customization features and the ability to build a national brand) for "phenomenal growth in reach and time-spent listening... According to Triton Webcast Metrics, Pandora’s listening in June 2012 accounted for approximately 5.98% of all radio listening, up from 3.37% of listening in June 2011... In fact, since September 2010 in any given month Pandora has captured between 78%-95% of the incremental internet listening."

So Pandora's created a huge online audience, but they face the same royalty hurdle as broadcasters. Despite an explosion of usage, Pandora's royalty obligation prevents them from being profitable. "We believe this lack of profitability is a major reason why terrestrial radio operators have not been more aggressive in marketing and promoting their online streams," reads the report.

"Venture capital firms continued to invest in Internet radio or digital music opportunities in the last year," writes Coady Diemar director Chris Ensley, despite a "lack of profitability" for companies like Pandora due in part to high royalty rates. But "most terrestrial radio companies, many of whom have public shareholders, were not in a position to incur" the type of losses associated with getting started in web radio. In Pandora's case, that totalled "$82 million in operating losses over the last six years."

AM/FM online listening flatlining or dropping for most

Those who've followed the Internet radio space since its inception will remember the industry's bewilderment at potential royalty bills amounting to many multiples of what any service was making at the time. How could something so one-sided in favor of the recording industry as the Digital Millennium Copyright Act -- which (largely) birthed the obligation for webcasters to pay for sound recording copyrights, at rates determined by the CARP (Copyright Arbitration Royalty Panel, now replaced by the CRB) -- have been passed? In 1998 there was no Internet radio industry to speak of to fight it. Had the NAB been "asleep at the wheel?"

The legend grew that broadcasters at the time weren't too worried about high online royalties. They served as a barrier to new media competition. And what did online streaming -- where audiences, and thus ad revenue, were miniscule -- have to do with end-of-the-quarter goals anyway? Radio certainly was in no position to spend $82 million and six years to find out.

As it turned out, of course, high royalties did not prevent the rise of Pandora and Slacker, nor has it prevented terrestrial radio's (still moderate) listening declines. It's also true now that broadcasters like Clear Channel recognize the importance of the Internet and see radio's gradual shift from "local over-the-air" to a market of audio content producers operating on all platforms.

In fact, Clear Channel and its iHeartRadio web and mobile platform are growing well. Ensley credits the company for being "aggressive in promoting iHeartRadio." Clear Channel has also sought clever ways of reducing the costs of streaming, like its new agreement with Big Machine (RAIN coverage here).

Coady Diemar Partners

"By combining its promotional prowess with a more satisfactory online royalty rate, Clear Channel should be able to reduce operating losses while increasing the speed at which iHeartRadio reaches profitability."

Indeed, Clear Channel and iHeartRadio may then be AM/FM's best hope, Ensley writes, especially when it comes to future car dashboards. "No radio station group on its own is likely to be able to compete with Pandora when it comes to being in dashboard on future car models." But by joining services like iHeartRadio or TuneIn, "radio companies can ensure they have a compelling service to compete with newer in-car/in-dashboard services such as XM Satellite and Pandora."

You can find the report from Coady Diemar Partners here.

RAIN Exclusive: Pandora AQH now over 1,000,000 according to Q3 financial report

Wednesday, November 23, 2011 - 11:30am

Pandora's Q3 fiscals were released yesterdayDuring its most recent quarter, Pandora's listening hours increased 104% from last year as its revenues grew 99%, according to the company's newly-released report on its fiscal third quarter earnings. (RAIN's Kurt Hanson calculates that this growth has pushed Pandora's AQH above 1,000,000 -- find our analysis below).

The company's current monthly active user count, 40 million, is up over 11% from July -- when it had 36 million active users -- and up 65% from the same quarter last year. Moreover, Pandora says its quarterly total listener hours have increased 104% from last year to 2.1 billion hours.

Pandora says that its listening accounts for 66% of the top 20 webcasters participating in Triton Digital's Webcast Metrics (up from 53% last year). The company also says its share of the total U.S. radio listening is now 4.2% (up from 2.1%).

Additionally, CEO Joe Kennedy (he's the one in the black turtleneck and sportcoat in the photo; Pandora founder Tim Westergren is in the brown sportcoat) said Pandora has seen "no impact" on its listening as a result of competition from music services like Spotify. 

Pandora CEO Joe Kennedy (center) with founder Tim Westergren (left)Pandora's revenues during its fiscal third quarter reached $75 million -- up 99% from last year. That includes $66 million in ad revenue (up 102%) and $9 million in subscription revenue (up 80%). Kennedy stated that about half of the company's ad revenue came from mobile, "a 'triple-digit' increase from a year ago," writes Business Week. As far as local advertising goes, Kennedy told analysts, "the percent of sales force devoted to local is a 'single digit percent,'" but local sales are still in the "beginning stages," Billboard reports.

In terms of operational costs, Pandora in fact generated a profit of $638,000 this quarter. That's compared to a loss of $1.77 million last year. "Excluding some items, profit of 2 cents beat the average 1-cent loss projected by 13 analysts in a Bloomberg survey," writes Business Week. However, if dividends paid to investors during Q3 are factored in, Pandora was not profitable this quarter.

The company now projects full-year revenues will reach between $273 and $277 million.

You can find more coverage from Billboard here, Business Week here, Forbes here and Reuters here. You can also find RAIN's coverage of Pandora's Q2 report here.

RAIN AnalysisRAIN ANALYSIS: As pointed out by RAIN publisher Kurt Hanson at last September's RAIN Summit Chicago event (watch his keynote here), if Pandora's financial reports are accurate in terms of their number of listening hours per quarter, Pandora's audience is significantly understated in the Triton Digital's monthly Webcast Metrics reports.

According to Webcast Metrics, Pandora had an AQH of 750,000 listeners in September. However, as noted above, according to the financial report, Pandora had 2.1 billion hours of listening in its fiscal third quarter (Aug.-Oct. 2011).
Assuming that about 15% of those hours were in overnights, that works out to an actual Sept. 2011 AQH (Mon.-Sun. 6a-12m) of about 1,100,000. (Here's the math: 2.1 billion hours, divided by 3 months in the period, times .85 to subtract overnights, divided by 18 hours per day, and divided by 30 days in the month.)
Pandora's VP of Corporate Communications Deborah Roth tells RAIN that the reasons that Webcast Metrics may be understating the total size of Pandora's AQH audience is that (A) Webcast Metics does not measure the commercial-free "Pandora One" listening, and (B) listening on some consumer electronic devices is not currently measured by Webcast Metrics.
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