competitor Spotify recently announced that its paid subscriber base
has reached 10 million globally. Total subscriber base reached
approximately 40 million. The news dragged Pandora's share price by
1.20% (30 cents), which closed at $24.73 on May 21, 2014.
In just a little more than 12 months, Spotify added 16 million
total active users and 4 million paid users as it expanded its
service to 28 new markets. In December last year, Spotify launched
its free service for
Android, which is a key reason behind its overall user base growth.
However, Spotify's active user numbers are expected to put Pandora
under further pressure in the near term. Although Pandora's active
user base ($76.0 million at the end of Apr 2014) is far higher than
Spotify's, the latter's fast growing user base is a major concern.
Additionally, Apple's plan to acquire Beats Electronics will
further intensify competition for Pandora in the ad revenue market.
Pandora earns about 73.0% of its revenues from advertising and is
relying on the revenue stream to offset its large content
acquisition costs. Pandora grew its advertising revenues 45.4% in
the first quarter to $140.6 million.
With an eye to enhance and diversify its revenue stream in the near
future, Pandora is extending its footsteps into various new
spheres. Recently, the company launched its new music
recommendation unit called Promoted Stations.
The new unit will feature sponsor-branded listening stations
whereby Pandora will receive some payments from these brands for
advertising their respective stations. In Mar 2014, Pandora
partnered with Peet's Coffee to create four branded stations that
provide the soundtracks in Peet's stores.
We believe that promoted stations will work especially well on
mobiles, which approximately account for about 80.0% of Pandora's
overall listening and 74.0% of the company's last-quarter revenues.
Pandora's initiative of launching in-car advertising is a major
positive in this regard. The company's partnerships with major car
manufacturers such as
Ford Motor (
will provide it a significant ad revenue growth stream.
Nevertheless, we believe that Pandora should focus on growing its
paid subscriber base at the same time, as it will provide a steady
revenue base amid rising competition. However, the company's move
to raise ad-free subscription price may result in a higher churn
rate in the near term.
Currently, Pandora has a Zacks Rank #3 (Hold).
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