Pandora this week (here) reported very positive financial and usage growth for its fiscal quarter that ended October 31. They also released impressive usage numbers for the month of November (the Webcast Metrics report for October, here, was also typically positive for the industry's leading webcaster).
And when a company has a $1.32 billion market cap, and reports these numbers, record labels and performers howl that Pandora would dare try to pay them less.
The first problem, as tech venture capitalist and blogger Fred Wilson explains, is that lots of people don't understand (or ignore) what "valuation" or "market cap" means. (Wilson recently spoke to Billboard's Bill Werde, who asked about Spotify's and Pandora's market caps.)
"(That) valuation is nonsense," he writes here (regarding Spotify specifically, but also Pandora indirectly). "Nobody bought their company for billions in cash. They are simply financings in which money traded hands on terms that spit out those big numbers."
Naturally, those types of figures make for good PR fodder. After all, how could Pandora complain? Billions of dollars! But for the small problem Wilson points out: the market cap isn't real money.
"But of course the record label executives don't care... They just look at the huge numbers and say 'f**k that.'"
In his talk with Werde (there's video on Wilson's site), Wilson goes on to point out that focusing on things like market valuation "complicates and prolongs" real royalty negotiations. "Maybe if these companies blow up and sell for ten cents on the dollar, someone will wake up and do the right thing."
And regarding those royalties (the second problem): right there in its Q3 report is the fact that while Pandora's revenues were $120 million -- up 60% from the same period last year -- the company's "content acquisition costs" (aka royalties) rose 75%. That's $65.7 million for the quarter, or 55% of gross revenue.
Look at Pandora's soaring mobile usage -- it's now 77% of total listening. But Pandora reportedly gets only $21.56 in advertising per 1,000 hours of mobile listening, compared to $55.18 for the same listening on desktop computers. Yet the royalty rates Pandora pays are the same, regardless of the device listeners use. Usage increases, royalties increase (they're set to go up in 2015), but revenue per listener falls as more migrate to mobile.
"In other words, the more successful Pandora becomes, the more it loses. And those through-the-looking-glass economics of Internet radio set off the drop in Pandora shares," wrote The Wall Street Journal yesterday here.
New guidance from Trefis (here) reads, "If content acquisition costs (as % of revenues) do not come down and stay around the current levels of 57% estimated for fiscal 2013 (calendar 2012), there could be downside of about 35% to our price estimate."
The fact that Pandora's stock indeed fell 20% after its Q3 report, and is trading near its 52-week low, indicates that while labels execs, performers, and lawmakers may not grasp the reality of Pandora's situation, Wall Street does.
"Yes, public investors value Pandora at something like $1.4 billion. And private investors think Spotify is worth at least $3 billion... But even those guys are in a precarious position, because they’ve yet to demonstrate that they can afford the cost of music they’re either selling or giving away. And they’re competing with the likes of Apple and Microsoft, which can afford to lose money on this stuff because they think it can help their real businesses."
