Personal Finance

Pandora Media Inc Lays Out Its 4-Year Game Plan

By the time the next presidential election rolls around, we will have a much better idea if Pandora Media (NYSE: P) will succeed or fail as a business. But if you do not have that much time or patience to see what happens, then this investment may not be for you.

Image source: Getty Images.

Pandora competes with the likes of Apple,Alphabet,Amazon , and Spotify for your listening time. To succeed in this crowded field, the company has laid out its strategy for the next four years encompassing three options for music lovers and a ticketing service to see live concerts. Management believes this product suite provides the company an opportunity to thrive in the music world.

Pandora in 2016

Twelve months ago, Pandora's offering was centered around an ad-supported model that highlighted music discovery in a lean consumer experience. The listener was exposed to new music based on their likes and dislikes coupled with the company's proprietary Music Genome Project algorithm for presenting songs based on the user's feedback. The user experienced a stickiness as they invested time in setting up personal radio stations, and advertisers liked being able to target ads based on location and the type of music that pleased the user. If a user decided they would prefer to listen without ads, they could subscribe to Pandora Plus for $4.99 per month.

Skip to today and the company has a much more robust offering. It added Ticketfly to the mix in October and targets ads for local concerts based on a user's music preference. This service is indicative of the relationship company founder and CEO Tim Westergren, a former musician himself, is building with the artists who supply the content for the company's service by working with bands to help drive a greater audience to their shows. Much of a band's revenue is now generated by live concerts.

Pandora in 2017

Looking forward to 2017, the company plans to roll out its latest offering, Pandora Premium. This on-demand service will allow subscribers to specify songs to play, as opposed to creating a radio channel with a limited number of skips. Of today's 78 million Pandora listeners, 58 million are currently using another service for on-demand music. Management's goal is to bring these on-demand music lovers back to the fold with Pandora Premium.

Here is how the company's product suite will look in the new year:

Pandora (with ads) Pandora Plus Pandora Premium
Price Free $4.99 per month Approximately $9.99 per month
Feature More skips (with ads) Unlimited skips Search and play anything
Feature Replays (with ads) Unlimited replays Build and share playlists
Feature Offline access Take all your music offline
Feature No ads More unique Pandora features

Data source: Pandora analyst day presentation Oct. 25, 2016. Chart by author.

The above chart shows that Pandora has beefed up its offerings by allowing users to skip more songs or replay the same song in return for allowing a video ad to play. There is also the capability for limited offline access in Pandora Plus and unlimited offline access with a Premium subscription. Offline access allows the user to minimize data usage, while on a flight for example.

The business side of the ledger

Moving to the financial side of things, the company is providing projections for its growth in users, ad revenue, Pandora Plus subscribers, Pandora Premium subscribers, and operating margins. These metrics will be useful for the investor who plans on tracking management's commitment to the established road map. If the company achieves its objectives on subscriber growth and ad revenue, the business should be viable as costs are already negotiated around music royalties for all three classes of service for the next several years.

Metrics 2016 2018 2019 2020
Total active users 78 million 110 million
Ad revenue per 1000 listening hours $58 $60 $70 $80
Pandora Plus subscribers 4 million 6 million 9.5 million
Pandora Premium subscribers N/A 3 million 11 million
Operating margin (13%) 15%

Data source: Pandora analyst day presentation Oct. 25, 2016. Chart by author.

Management's consolidated view of the company's 2020 business model, inclusive of the advertising, subscription, and ticketing revenue, can be seen below:

Metrics ($ in millions) Core Radio Premium Ticketing Consolidated
Revenue $2,400 $1,300 $300 $4,000
Content costs $1,160 $850 N/A $2,010
Ticketing costs N/A N/A $180 $180
Other costs of revenue $115 $15 N/A $130
Gross margin 47% 34% 40% 42%
Operating margin 18% 10% 15% 15%

Data source: Pandora analyst day presentation Oct. 25, 2016. Chart by author.

These projections show a Pandora that is firing on all cylinders within four years.

Going forward, it will be interesting to track management's ability to execute against the bar they have set for themselves and to see if they can achieve success within this highly competitive market.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Frank DiPietro owns shares of, Apple, and Pandora Media. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares),, Apple, and Pandora Media. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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