Market Watch

Pandora Plans to Go Public as it Flirts with Profitability


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Pandora, the personalised internet radio provider, has applied to the US Securities Exchange Commission for an initial public offering (IPO) with a valuation of $100m.

Specifics - such as share prices, the number of shares available, and opening date for the sales (estimated to occur in three months time) - have yet to be confirmed by the company's underwriters, Morgan Stanley and JP Morgan Chase.

In its application, Pandora reported its nine months to 31 October 2010 earnings amounting to over $90.1m, representing a 187 per cent year-on-year growth, with nine months' income, after operating costs, of $819,000. Pandora is still operating at a net loss, but this has been reduced by 98 per cent year on year to reach a record low of $328,000.

Analysis
It's interesting to compare Pandora's $100m IPO with CBS's 2007 acquisition of Last.fm. Last.fm, with a 15m-strong user base, was bought at the height of investors' enthusiasm for social media for $280m. Since then it has recorded losses of several million dollars per year (e.g. $2.8m in 2009). Comparatively, Pandora currently has over five times as many users as Last.fm at the time of the latter's acquisition and is opening part of its stock - albeit an undisclosed amount - for $100m: an interesting figure given that the company, unlike its British-born competitor, is on the verge of breaking even.

By contrast, Pandora's positive financial results may be accounted for by a number of factors. Increasing interest from advertisers, ultimately driven by strong user growth is an obvious first explanation: with over 80m registered users and 3.9 billion hours of radio aired by January 2011, advertising income represents over 86 per cent of Pandora's revenue; the remainder accounted for by subscription services. Despite this impressive growth, the real responsibility for Pandora's strong financial position can be attributed to changes in royalty fees.

Back in 2007, the Copyright Royalty Board (supported by the Recording Industry Association of America) established a fee schedule for internet radio which essentially crippled most online radio providers and made their business models of the time non-viable in the long run. At the same time high royalty demands in some European territories caused Pandora to close down its services outside of the US between July 2007 and January 2008. Despite the abortion of these services, Pandora's royalty bill amounted to 15.7m between February 2008 and January 2009, a sum representing 81% of its revenue of the time. Only by striking a deal with SoundExchange (the US royalty collecting organisation) in July 2009, which cut per-stream rates by 40 to 50 per cent, was Pandora able to prevent closure, with royalties representing 58 per cent of its revenues in the first nine months of 2010. It is important to note, however, that this deal is set to expire by 2015, leaving one to wonder whether these advantageous fares will be long-lived after this date or whether Pandora's business will be robust enough to support higher per stream fares.

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