LOS ANGELES�There�s a lot of talk about the pure-plays in the virtual pages of Digital Radio Update, and rightly so. They�re undoubtedly providing the strongest source of competition since TV became commonly used during the early 1950s.from Forbes magazine.� Feel free to read the entire article should you have any notion that I�m taking anything out of context.�
Take Pandora for example. How is it doing, financially? Let�s take a look at the latest results. The article we�re referring to below is entitled �Pandora’s Q2 Results Showcase Its Survival�Instincts�
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�The company�s net revenues grew (in Q2) 30 percent year over year to $285.6 million, just ahead of the consensus estimate of $283 million.�Pandora�s topline growth was mainly driven by a staggering 67 percent increase in its local advertising revenues, which has been one of the prime focus areas for the Internet radio company lately.
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�There still exists significant scope for growth for Pandora given that the local ad industry is currently dominated by terrestrial radio companies, who cumulatively earn over $14 billion from the market.�
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�On the bottomline front, while the company�s net loss widened from $11.7 million in Q2 2014 to $16.2 million this year, (when) excluding amortization and stock-based compensation, Pandora reported profit of $ 11.6 million, an increase of 30 percent year over year.�
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Well that sounds pretty impressive, right? That�s 4�percent�of their revenue.
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�Pandora�s ability to properly manage its content cost will come in handy when it starts paying higher royalties beginning next year. In fact, the company�s survival will depend upon it.
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�Pandora�s royalty rates are set to increase substantially in 2016, which will have a significant negative impact on its bottomline. Though the company has presented the best possible case in the ongoing �Webcasting IV� royalty rate setting proceedings, it is unlikely that Pandora will be able to prevent scheduled increases. The best thing it can do is to leverage its content acquisition costs, by growing revenues at a faster pace with better monetization. Fortunately for the company, Q2 turned out one of the better quarters for its content acquisition costs as they declined close to 500 basis points (as percentage of revenues) to 46%. There will definitely be a spike in content acquisition costs as percentage of revenues next year, but recent performance indicates that Pandora will be able to bring the figure down gradually in the subsequent years.�
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It sounds to me like the key to Pandora�s survival is to run more commercials.� So, on one hand, we have more competition in sales; but on the other hand, one of Pandora�s great features for listeners�lack of commercials�sounds like it needs to disappear. �
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Taking just the top five radio stations in the U.S.�just five out of literally thousands of commercial stations�you can add for yourself a topline revenue of $273M.� Pandora�sQ2 revenueis roughly equivalent to theyearlygross of the top 5 stations in the country.� For simplicity, multiply their Q2 revenue by 4, and you�ll note that Pandora�s yearly revenue (based on that assumption) is about 13 percent of the 2014 revenue for all of commercial radio in the U.S.� To me, that sounds pretty impressive, considering how long Pandora has existed.� Still, they face many financial headwinds (at least according to Forbes). �
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