Watch CBSN Live

Pandora's IPO Shows Limitations of Relying on Ads in Digital Media

If you like listening to Pandora, the customizable music-streaming service, you will be depressed to learn that its business model -- as presented in its initial public offering -- appears to be unprofitable because it is upside down. That's bad news for any kind of digital media provider trying to make money by selling ads next to content.

In fiscal 2010, Pandora made a loss of $16.7 million on revenues of $55.1 million. Here's the breakdown of advertising revenues to subscription revenues:

  • Pandora revenue streams
  • Advertising: $50 million (91%)
  • Subscriptions: $5 million (9%)
Now take a look at a comparable music service, Sirius XM (SIRI). That company has a slightly different business model, of course. Its listeners have to pay a subscription to hear it. In Q3 2010, Sirius made a profit of $71 million on revenues of $717.5 million. Here's the ad/subs breakdown:
  • Sirius XM revenue streams
  • Advertising: $16 million (2%)
  • Subscriptions: $612 million (85%)
(Sirius has two other small revenue streams, which we're not interested in here.) Clearly, the two companies are mirror images of each other. One makes money, Pandora doesn't. One makes a majority of its sales from subs, Pandora doesn't.

Going mobile... not such a good thing for Pandora
There are two other worries for Pandora. One is growth in mobile users. On paper, this is great. The Pandora app is wildly popular. But users know it's a battery killer. Listen to Pandora on your phone on the way to work in the morning and you better make sure you've brought your charger with you if you want to make any calls after lunch.

The other is automobiles. Some cars like the Ford Focus, Mini and Mercedes-Benz have ports that allow you to plug your phone in and listen to Pandora through the car's stereo system. Again, sounds great, especially as Americans increasingly want to use their phones to control everything around them. But the Mini has a preference for interrupting your Pandora session by starting up iTunes. (Thank you, Steve Jobs!)

Those are technicalities. They can be fixed. From a strategic point of view, Pandora needs to find a way to make it difficult or expensive for users to leave the service (right now it's easy) and to make them pay to use it when they stay (which most don't). In short, its business model is currently the exact opposite of where it needs to be.

Disclosure: The author is a longtime Pandora user. He created Beep-Thump Express, easily the best techno channel on Pandora.

Image by Jules Joseph Lefebvre: Pandora, 1882, Wikimedia, CC.
View CBS News In