Personal Finance

Pandora Media Is Pinning Its Future on the U.S. Market

Man sitting on couch listening to music on his phone

It's been quite a month for Pandora Media (NYSE: P) . The company announced yesterday that co-founder and CEO Tim Westergren would be stepping down as part of a senior management shakeup. CFO Naveen Chopra will act as interim CEO while the company searches for a new leader. Furthermore, Westergren is also leaving the board. Pandora is adding a new director, Jason Hirschhorn.

Westergren's resignation confirms rumors that had been floating around in recent days. Former CFO Mike Herring and CMO Nick Bartle are also leaving Pandora.

Pandora also says it will be pulling out of Australia and New Zealand, the only two international markets it had entered, in order to "remain laser-focused on the expansion of our core business in the United States." In other words, Pandora is going to be a U.S.-only affair for the foreseeable future. Here's the rub: Pandora doesn't have a good chance competing solely in the U.S. That recent $480 million cash infusion from Sirius XM Radio will help, but it might not be enough. Pandora did just lose $250 million over a year and a half from the botched Ticketfly acquisition.

Man sitting on couch listening to music on his phone

Image source: Getty Images.

No license, no on-demand service

As with most music-streaming services, it all boils down to licensing agreements. Pandora desperately needs to expand its new Pandora Premium on-demand service, which finally launched in March , that allows users to listen to specific tracks and albums. While Pandora made a name for itself years ago by offering internet radio, consumer preferences have been steadily shifting away from curated radio toward on-demand for years. At a minimum, users expect a little bit of both, but with more emphasis on on-demand these days. That's where Pandora fell behind and lost its first-mover advantage.

Meanwhile, Pandora has long relied on statutory licensing administered by SoundExchange; statutory licensing is unique to the U.S. copyright law, with no equivalent system outside of the U.S. The company only recently inked direct licensing deals with the major record labels in order to launch Pandora Premium. Here's a relevant excerpt from the 10-K (emphasis added):

We currently operate the Pandora service in the United States, Australia and New Zealand. In Australia and New Zealand, we have licenses from copyright owners to provide our ad-supported and subscription radio services without the additional interactive features that we introduced in the U.S. on September 15, 2016, and we do not yet have the necessary licenses from copyright owners to launch an on-demand music service in Australia or New Zealand . Therefore, in order to introduce interactive features into our existing services in Australia and New Zealand, or to launch an on-demand music service there, or to launch any interactive or non-interactive music streaming service anywhere else in the world, we will need to negotiate and execute license agreements with the necessary rights holders. We may not be able to obtain all of the necessary rights to expand our service offerings on commercially viable terms, or at all. If we are not able to obtain the necessary licenses on commercially viable terms, then we will not be able to proceed with our international service expansion plans, and our growth could suffer materially. This could adversely affect our business, financial condition and results of operations.

OK, so Pandora was going to have an extremely hard time negotiating favorable terms for international direct licensing for an on-demand tier, which the future of Pandora relies upon. It makes sense, mostly out of necessity, to cut its losses in an effort to shore up the core U.S. business. It's hard to quantify the financial impact, as Pandora does not disclose the geographical mix of paid subscribers or active listeners. At the end of the first quarter, Pandora had 76.7 million total active listeners and 4.7 million total paid subscribers.

Slipping into irrelevance

The trouble is that Pandora is competing with two heavyweights, Apple and Spotify, that are taking over the market for paid music streaming. Consider each service's user base.

Service Paid Subscribers Ad-Supported Users (Excluding Paid Subscribers)
Spotify 50 million (March 2017) 90 million (June 2017)
Apple Music 27 million (June 2017) 0
Pandora 4.7 million 72 million

Data sources: Spotify, Apple, and SEC filings. Pandora figures as of the end of Q1 2017.

Neither Spotify or Apple disclose a geographic mix of their users either, but they both have secured the necessary direct licensing agreements to operate all around the world. (Spotify is available in 60 markets, and Apple lists 115 countries where Apple Music is available.)

It's unlikely that Pandora will be able to meaningfully challenge Apple Music or Spotify in the U.S. market, in part because Pandora has so much on its plate right now. It's navigating a massive transition not only in senior management, but also in its underlying business model and cost structure. It also lacks the number of third-party integrations that rivals offer. Unfortunately, Pandora has slipped into irrelevance in the market that it helped create.

10 stocks we like better than Pandora Media

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Pandora Media wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 5, 2017

Evan Niu, CFA owns shares of AAPL. The Motley Fool owns shares of and recommends AAPL and Pandora Media. 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.

Other Topics


Latest Personal Finance Videos

Black Friday Brings Higher Demand and Scarcer Deals

Nov 26, 2021

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More