Pandora’s Inflexion Point
Pandora Radio, the pioneering Internet service that creates customized radio stations for listeners, is facing perhaps its greatest challenge to date since its IPO in 2011. The announcement on June 27th that storied founder and CEO Tim Westergren was stepping down from both the company and its board of directors is momentous. In quick succession other key leaders left, including President Brian Herring and Chief Marketing Officer Nick Bartle. Naveen Chopra’s appointment as Interim CEO suggests some continuity, for Chopra was Chief Financial Officer before the shakeup. Yet investors and shareholders, as well as music industry analysts, are surely looking at a watershed moment in the company’s history.
Pandora Premium
Underlying it all is the launch of Pandora Premium earlier in the year, a service that enables users to have a similar experience to Spotify, but with mobile-only access. Pandora Premium has so far done little to make Pandora a player in the interactive streaming market – always a stretch for a company used to dealing with only non-interactive Internet radio streams (interactive streams are associated with music purchases, while non-interactive streams are associated with passive listening to a pre-programmed diet of music). The executive turnover at Pandora is therefore likely a belated recognition of the failure of Pandora’s new project and the restlessness it generated among its management structure. Apple Music, moreover, is all over the streaming space and has abundant financial resources; all things being equal, it enjoys an overall market advantage above Pandora and is a factor of unease.
In March of this year, the tone at Pandora was cautiously optimistic. Tim Westergren had returned to the company as CEO after a long hiatus. The company was preparing to roll out its new paid Pandora Premium tier, and was getting a fresh start with record labels and content creators after the payment of record label and featured artist fees to SoundExchange was resolved in a judgment that favored neither side. Nevertheless, there was little to differentiate Pandora Premium from other services and turning Pandora users into paying subscribers proved challenging.
Sirius XM and Liberty Media
Just prior to Westergren’s resignation, news broke that satellite radio giant Sirius XM — the other large non-interactive borderless radio service — had made a considerable investment into Pandora Radio. Rumors of a Sirius XM buyout had been circulating the industry for the past year. However, Pandora rejected Sirius XM’s offer for a total acquisition and opted for a cash injection instead, leaving Sirius XM with a 19% stake in Pandora and three seats on the board (including the chair) in exchange for a $480 million investment.
Although Pandora can undoubtedly use the capital, the reported deal terms seem to favor Sirius XM disproportionately. As a result, the deal additionally prevents Sirius from buying any more Pandora shares for the next 18 months. It also prevents Sirius from acquiring more than 31.5 percent of the company without Pandora board approval. But with an important seat at the board, more capital, resources, and flexibility, Sirius seems to have a significant upper hand over Pandora. It is no coincidence that the announcement of Sirius XM’s investment came just before Pandora changed management.
This isn’t the first time Pandora has turned down a deal like this. A year ago, Pandora’s Board rejected a $15 per share offer from John Malone’s Liberty Media that would have valued Pandora at $3.4 billion. In June, Pandora stocks hit a brief all time low. Stocks have since recovered slightly and currently sit somewhere around $8, almost a 50% decrease from the price Liberty offered a year ago. Pandora left much money on the table by not accepting the original deal, and this surely become a source of wrath against Tim Westergren.
Income Sheet
Financially, Pandora has not performed well. Despite having 75 million active users and over 4 million paying subscribers, it has continued to operate at a loss in every one of its seventeen years in existence. This is in spite of data that suggests Pandora is the most streamed music service, with a 28% share of music listening against YouTube’s 27% in 2016. Ad revenue, the main source of Pandora’s receipts, has never been enough to turn the company around (which partly explains the quest for Pandora Premium), even though results improved. For instance, annual revenue for 2016 increased by 19% to $1.39 billion, but such income was dwarfed by the fact that the company’s net losses increased by 102% to account for a hearty total of $343m.
By 2017, Pandora was accepting Sirius XM’s investment and selling its TicketFly business to Eventbrite for a combined money-in total of $680 million ($480 million from Sirius XM plus the $200 million dollar sale of Ticketfly). Another sign of retrenchment came the day after Tim Westergren’s resignation, when Pandora announced it would be eliminating its stand-alone international service in Australia and New Zealand in order to have a single-market focus on the United States. Local staff reportedly did not expect the decision, as business in Australia and New Zealand had been growing steadily in recent months.
Conclusion
When the company first began, it provided a passive listening experience for consumers, and it’s early success was attributable to its ease of use. It’s online platform, based on Westergren’s original and innovative Music Genome project, aimed to predict user habits in order to custom-create a unique listening experience, not to service the kind of user who creates an exclusive experience for themselves through the use of playlists. In its earliest days, Pandora was designed to provide distraction-free music listening and discovery for the average listener. This implied being the background music at family pool parties and the soundtrack to car rides with friends; it was the digital answer to traditional radio. Now, alas, if the proliferation of playlists means that the consumer market no longer values such a passive musical experience, and, as well, Pandora cannot gain traction on the on demand streaming, then the company’s road ahead will be particularly rough.
If Pandora can find a way to return to its roots, i.e. to place emphasis back on passive listening in the US market and win back the casual music listener as a viable source of music consumption, it could turn things around. Spotify and Apple Music offer a place to get lost in hours of playlists and curated content but don’t do what Pandora does well (admittedly with an income sheet loss). By emphasizing deals with retail chains, automotive services, and mobile companies, Pandora has the potential to become the ultimate background-music experience. Stand-in CEO Naveen Chopra seems to recognize this when he alludes to the company’s desire to return to the passive listening experience that launched its start.
Tim Westergren, the Music Genome Project, and Pandora Internet Radio enabled the future of music listening and discovery for today’s artists and tech companies. It would be a pity if history did a bad turn to an industry great.
By Lysa Hetrick
