IPO opens Pandora’s box of questions

Didn't take long for co. to make a splash

Internet radio leader Pandora Media debuted on the New York Stock Exchange Wednesday, with execs on hand to ring the opening bell, and it didn’t take long for the company to make a splash.

Though Pandora had announced stock prices ranging from $7 to $9 per share in the lead-up to its initial public offering (later raised to $10-$12), the stock opened at $16 — trading under the enviably simple symbol “P” — and quickly reached prices as high as $26 per share.

Though prices eventually leveled out at around $20 and closed at $17.42 with a market capitalization of $2.56 billion, the bow was significantly higher than projected. Not a bad market debut for a company that has yet to turn a profit.

Of course, Pandora is hardly the only tech company to make waves on the market of late. Professional networking site Linkedin made its public bow last month, and bargain site Groupon and social game creators Zynga are also preparing IPOs. But Pandora is unique among Internet music sites to do so, and — having already weathered one dot-com bubble in its early years — may be better equipped to deal with the market’s inevitable spikes and troughs.

“We’re thinking about years down the road,” Pandora’s founder and CSO Tim Westergren told Variety the morning of the opening. “We’re still only 3% of a huge category (total radio listening), so we don’t really think about that in the near term.”

Not the most stable business in even the calmest of times, the Internet music sphere has been further shaken up in the months since Pandora filed its S-1 registration statement with the SEC in February. Three major companies — Apple, Google and Amazon — have unveiled cloud music storage systems, while Pandora’s nearest online radio competitor Slacker launched an on-demand service and Europe’s Spotify threatens to finally make a Stateside impact, after securing the blessing of three out of four major label groups and flirting with Facebook as a partner.

Westergren is unconcerned with potential competition in the latter sphere, pointing out the 80%-20% split between radio listening and owned-music listening, respectively, as percentages of overall music consumption; an historically stable split that Westergren has argued looks unlikely to change any time soon. While services like Spotify, MOG and Rdio are often grouped in with Pandora, Westergren sees them as competing in a fundamentally different space.

“These companies all exist in the on-demand category, which we view as a complementary sphere to Pandora,” Westergren said.

A more immediate threat to Pandora’s future is the hefty fees the company pays to the Copyright Royalty Board. In the nine months ending October 2010, Pandora paid 45% of its total revenue in fees to collecting agency SoundExchange. And given that those fees are accrued on a per-track, per-listener basis, the more users and more traffic the site attracts the more it pays.

“We’re confident we have a good business, but it’s true: We pay too much in royalties,” Westergren said, alluding to the far lower amount that terrestrial radio stations pay compared to satellite and Internet radio. “It’s unfair, and we’re going to have to do something about it.”

Pandora’s agreement with SoundExchange comes up for renegotiation in 2015, and President Obama has voiced his support for reconsidering terrestrial radio royalty exemptions. In the meantime, the company may be doing all it can to goose its advertising base. Though it offers both free, ad-supported subscriptions as well as a paid, ad-free tier, roughly 86% of the company’s income comes from ads, and finding ways to grow the often unstable markets of mobile and browser advertising could be key.

Pandora will surely be riding high on early IPO interest. With 90 million subscribers and rising, and no near like-for-like competitor, the company doesn’t see the influx of capital as any reason to rack up acquisitions or to change course.

“Our first move tomorrow is to do more of the same,” Westergren said, simply. “This doesn’t change our strategy.”

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