Why Pandora Still Has a Long, Long Way to Go

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Pandora Media’s Q1 2018 may look great at first.  But, just look a little closer.

Pandora Media has reported better-than-expected first quarter financial results.  The company posted a lower quarterly loss thanks to higher subscription revenue and smaller declines in advertising.

Breaking down the numbers, Pandora Media’s total subscription revenue skyrocketed 61.3% to $104.7 million.  Analysts had expected $104.6 million.  Pandora’s advertising revenue also dropped just 3.9% to $214.6 million.  Analysts had expected a larger drop totaling $198.7 million.

In addition, Pandora posted a loss of 27 cents per share, beating estimates of 38 cents per share.  Total revenue had also jumped to $319.2 million.  Analysts had expected $304.3 million.

The news sent the stock up 8% in after-hours trading yesterday.  In fact, on Friday, Pandora Media shares had its best day in years.  Jubilant investors helped push the stock up 19.20%, or $1.11.  This marks the company’s largest percentage gain since it went public 7 years ago.

So, has Pandora finally managed to turn things around?

Speaking on the company’s Q1 2018 results, Roger Lynch, Pandora’s Chief Executive Officer, attributed the positive results to “new marketing initiatives.”  Instead of focusing on mass subscriptions through brand marketing – just look at Spotify’s dismal Q1 2018 results – Lynch has conducted data-based marketing.

Data-based marketing allows Pandora to gauge users’ listening preferences.  This, in turn, allows it to implement strategies to lure users into spending more time on the service.

The results speak for themselves.  Pandora ended the first quarter of 2018 with 5.63 million paying subscribers.  Year-over-year, Lynch single-handedly managed to grow the company’s subscriber base 19%.  In addition, compared to Q1 2017’s $64.88 million, subscription revenue grew 61.4%.  Lynch claims that March marked the first time in over a year that “lapsed users” have returned to the service.

No.  No, it hasn’t.

I’ll give Pandora Media and Lynch credit where credit is due.  After five months of shares hopelessly stuck below the $5 mark, Pandora –against all odds – has managed to impress analysts enough with better-than-expected numbers.  Now, investors remain optimistic about the company’s long-term future.

Yet, just dig a bit deeper into Pandora’s Q1 2018 earnings.  You’ll find one fact that continues to haunt the company after 18 years on the market: Pandora has yet to turn a profit.  Even worse, it may not even know how.  And, the company’s new strategy may ultimately put the final nail on its coffin.

Pandora Media’s net loss grew to $131.7 million, a slight 0.5% drop year-over-year.  Adjusted EBITDA was also a loss of $73.3 million, a 2.8% increase over the same quarter last year.

Pandora’s overall engagement has also declined.  At the end of Q1 2018, the digital radio service had 72.3 million active listeners.  Last year, it had 76.7 million.  Total listener hours also dropped to 4.96 billion, down nearly 5% year-over-year.

In addition, research firms have shown that Pandora has started losing its core audience.  The digital radio service recently topped Triton Digital’s February 2018 Top 20 Ranker for digital audio with 2.53 million average active sessions.  Yet, Spotify came in second place with just 37,000 average active sessions behind Pandora.  In the following months, Triton Digital hinted that the European streaming music service may take first place.

The numbers don’t appear to alarm Lynch.  In fact, he appears to have a rebound strategy all lined up.

Going all-in on Freemium.

Pandora will reportedly increase its marketing spending in the next quarter.  The company has now placed a greater emphasis on its ad-supported service.  In exchange for viewing a certain amount of video ads, freemium users will unlock Pandora’s on-demand premium listening features.

This strategy clearly hasn’t worked for Spotify.  The European service’s Q1 2018 revealed a 22% drop in ad-supported revenue over the fourth quarter of 2017.  Disillusioned investors punished the stock.  On Wednesday afternoon, Spotify’s stock sat comfortably at $170.  Now, two days later, Spotify shares have plummeted nearly 9%.  It’s currently limping along at $154.26,  So, why does Lynch believe it’ll work for his company?

Simple.  Because it has to.

Content licensing fees for paid users grew 57% year-over-year, from $2.96 to $4.95.  According to Variety, the company now makes less money from paying users.  So, what’s Pandora’s strategy?  To provide a faux ad-supported ‘Premium experience.’ Basically, pulling the wool over freemium listeners’ eyes.  They end up listening to ads believing that they’re saving money on a streaming music subscription.  And, Lynch and Pandora desperately collect as much as they can from advertising revenue, lest share prices should fall below $5 once more.

If successful, the company will ultimately pay less on content licensing fees and earn a lot more on advertising.  But, one key question remains: With plummeting listenership and fewer average active sessions each passing year, will this strategy actually work?  According to Lynch, of course! He eagerly told investors during the company’s earnings call yesterday,

“I really, really like the fact that we have a balanced model between advertising and subscription.”

Historically, however, Pandora has merely repeated the same mistakes it’s always made.

Co-founder and former CEO Tim Westergren promised investors that the company would finally turn a profit in 2017.  Tim Westergren no longer works at the company.

Will Roger Lynch prove any different?

Featured image by Petteri Sulonen (CC by 2.0)