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Wonder seized them

3 June 2011 By Jeffrey Goldfarb

Pandora Media is distinctly Web 2.0. Its Music Genome Project tailors Internet radio stations to individual tastes. Pandora is using that DNA to capitalize on investor demand for hot tech plays, with an initial public offering price range that, at the midpoint, values the company at a cool $1.3 billion. But investors should be going in with their eyes, not just their ears, open. Pandora’s business model is pretty old school.
It might look like a rival to Sirius XM – the highly-valued satellite radio monopoly. But Pandora’s primary competition is in the analogue dashboard of terrestrial radio. Pandora generated almost 90 percent of its $138 million of revenue in the year to Jan. 31 from advertising. Sirius coin comes from 20 million paying subscribers.
Pandora also doesn’t have the financial scalability of a Facebook or the network-effect stickiness of an OpenTable, the online reservations system. The more people who listen, the more royalties the company pays for music. As a result, total operating expenses move up nearly in lockstep with sales.
The company is, of course, growing in popularity. Registered users have quadrupled to 94 million in two years. Advertisers can’t help but take notice. By 2014, some $17 billion will be spent on American radio spots, IDC forecasts. Snatching a mere 3 percent of that would nearly quintuple Pandora’s existing revenue.
But that may not be so easy. Though AM/FM radio’s popularity is waning, listeners still tune in for more than two hours a day, according to Bridge Ratings. By contrast, based on Pandora’s figures, its users log in on average for considerably less time. That could take some shine off Pandora’s ability to target ads more precisely.
It also means despite Pandora’s impressive growth, its valuation looks exuberant. Sirius trades on an enterprise value of about 3.8 times estimated 2011 revenue, according to Thomson One Analytics. Terrestrial operator Cumulus bought rival Citadel earlier this year for about 3.2 times. Split the difference, generously assume Pandora’s top line doubles again this year and the company would be worth less than the low end of its IPO price range. And that still overlooks the lack of any profit after six years.


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