Last Updated Jun 16, 2011 1:33 PM EDT
The obvious question to ask regarding Pandora's (P) moderately successful IPO debut is, How can a company that isn't making any money command a $2.5 billion market cap? The obvious answer is expectation of rapid revenue growth. But Pandora has a problem: to access that growth, it needs to replace the trusty car radio. And Sirius XM (SIRI) has already done that.
Pandora-philes (and I'm one) could say, Well there will be apps, there will be more Internet-based in-vehicle infotainment systems, yada yada yada. The usual range of predictions that would at some point down the road see Pandora's predictive musical algorithm and the automobile blissfully converge. Unfortunately, investors are going to go broke waiting for this.
You get what you pay for
Pandora offers a neat piece of technology that's sort of like a cloud-based iPod shuffle. People who like traditional radio, with its predictable formats, like Pandora because it refines the model. Instead of the classic rock station, with its reliable cadence of Led Zeppelin spins, you can create Led Zeppelin radio and explore various artists who were influenced by Jimmy Page riffs or the libidinous yodels of Robert Plant.
But of course you have to be a radio-liker to go for this kind of thing long term -- and you may even (yikes!) have to consider paying a fee for it. And increasingly, we are not a radio-liking society, music-wise anyhow. We are a playlist-making people. Musical tastes are so refined and elaborately parsed now that only folks like me (read: aging GenXers) jettison iTunes for Pandora.
Sirius XM, meanwhile, has two major competitive advantages over Pandora:
- It has nurtured long relationships with automakers -- acquiring an initial Sirius XM subscription is synonymous with "buying a new car" in many cases
- It sells programming (as in "sells," as in "exchanges content for actual money" ; and "programming," as in "professionals, not technology, curate what people with pay money to listen to, like Howard Stern and pro football)
For the record, this would bum me out. I plug my smartphone into my dashboard and listen to Pandora in my car all the time. And I can see Pandora sharing space with Sirius XM in far more sophisticated infotainment systems than what I'm currently rocking (which would delight a part-time teenage lifeguard in the summer of 1999). But I can't see enough people paying for Pandora.
Which means advertising. A lot more advertising. Or the complete absence of advertising.
Paying to make the ads go away
Upgrading from basic Pandora gets you more hours of music and eliminates the jarring ads that interrupt the algorithmic mix tape. So there's a revenue stream, but a bit of a whacked one: users pay to make another revenue stream, ads, go away.
This can't be an appealing pitch to advertisers of any national reputation. This leaves the local market, which could actually be Pandora's one killer arrow in an otherwise sad quiver. Local and car radio were made for each other. If Pandora does become a legitimate in-car alternative to old school terrestrial radio, the local ads have to go someplace. And it won't be Sirius XM.
So there's hope. But the truth is, I'm not optimistic. And I'm not alone.