Can Pandora Ever Break Even?
Despite having the largest streaming music user base by far, Pandora Media Inc. (NYSE: P) just cannot seem to break even. It is an uphill battle that just got even steeper as it just lost a court case to BMI and will now have to pay 2.5% in royalties instead of 1.75%. The main problems are two: First, its per-user value is comparatively low, and second, it is too inefficient.
Pandora may boast the largest active user base in streaming music of 81.5 million, but in terms of per-user value, if we annualize last quarter’s revenue, it comes out to $11.32 per user per year. If we match this up to its market cap of $3.74 billion, that is $45.88 in capital value per user.
The numbers actually make quite a bit of sense in context. Run Spotify on the same metrics, and the private music streamer is estimated to be worth $8.4 billion based on capital raises. It boasts a 60 million monthly user base with 15 million paid subscribers. By default, Spotify users are worth $120 per year, since they pay $10 a month, but take into account the entire active user base of 60 million and we are at $30 per user annually. That’s 165% higher than Pandora’s per-user value, and Spotify is valued at 125% higher than Pandora. That is not quite 165%, but if we take into account that Spotify’s active user base is 25% lower than Pandora’s, the market valuations line up almost perfectly.
From here on out, Pandora can do one of two things. It can cut back and try to eke out a small profit by reducing staff, or it can go all out, foot on the gas, and try to expand its user base in order to make it look more attractive to a potential suitor that can increase per-user value to something closer to Spotify’s.