Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Pandora Media may be exploring a sale, but a willing buyer may be harder to pin down.

The Internet radio service surged as much as 14.8 percent Thursday on news of a potential sale before giving up much of the gains after hours in response to disappointing earnings. Even with some expectations of a potential deal now reflected in the stock price, the shares closed roughly 77 percent below their record high, meaning shareholders don't expect the $1.9 billion company to fetch anything close to a knockout premium. 

Off Key
The internet radio company's stock is nearly 80 percent off its all-time high.
Source: Bloomberg

Pandora is at least partly responsible for the jam in which it finds itself. Executives have missed opportunities to shift the company's business approach, feuded with the music industry and relied on an oddball government rate for licensing that was out of their control and a near-permanent source of investor anxiety. With that last part now settled (a government tribunal in December set a fixed rate for Pandora's music royalty fee), a window has opened for a sale to rivals that took a different path.

Google, Spotify, Apple, Amazon and other music service providers went hat-in-hand to the music industry poobahs and negotiated contracts for the rights to stream their songs. It wasn’t cheap, nor was it easy to deal with big egos and inflated financial expectations in the record business. 

But now those tech companies have access to the most important part of the supply chain. Pandora wants the same deals now, and now must negotiate music-industry deals from scratch. That won't be simple at a point when it has almost no leverage because of rising competition for listeners and for song rights -- and because the music industry hates Pandora.

Meanwhile, the tech titans appear to be eroding Pandora’s head start in digital music. Pandora last fall blamed new free trial offers of Apple Music for a slowdown in usage, but the trend persisted through the fourth quarter. The amount of time Pandora users spent on the service grew just 3 percent in the period from a year earlier. That compared to a 15 percent increase in listener hours during the final quarter of 2014. The number of people regularly using Pandora also declined slightly in 2015.

Pandora also is burdened with exorbitant costs for music licensing that have helped make the company unprofitable each year since its 2011 IPO. The company’s loss from operations was $170 million in 2015, as the cost for song rights gobbled 52 percent of Pandora’s revenue, or $610 million.  

Play, Skip or Pause?
Pandora pays more than 50 cents of each dollar in revenue for royalties on the songs it streams to its listeners. The music fees are a big reason Pandora is unprofitable.
Source: Pandora SEC filings
The figures for 2012 and 2013 are for 11 months.

It may be that the only parties that would be interesting in Pandora and have the means to buy it are the same tech giants crushing the company. Google, Apple, Amazon and Microsoft could incorporate Pandora into their existing digital-music services, and their fat wallets would enable them to keep paying Pandora's tab for song rights. 

While Pandora's Internet radio service isn't a "must-own," it could be a nice add-on, for example, to YouTube, which is the most used streaming music service in the world. Even a generous $3.9 billion takeover price -- a 50 percent premium to Pandora's current level -- would only represent about 5 percent of Google's cash and marketable securities. That same price tag  equates to about 9 percent of Apple's cash and marketable securities , and 4 percent and 20 percent of Microsoft's and Amazon's, respectively. Any of them could easily afford it. 

Uphill Battle
Due to increased competition, the radio service's annual listener hours isn't growing as quickly as it was.
Source: Pandora SEC filings
*2010 and 2011 figures are for 11 months

But before getting too carried away about what could be, it's useful to remember that betting on potential takeovers can result in heartbreak. Yelp, which paused its own exploration of a sale last year, has since plunged to a three-year low. And although Rackspace's decision to reject suitors looked like the right move for a while, its stock has plummeted to a five-year low. 

Pandora executives on Thursday stressed their confidence in a five-year strategy that involves starting a new service similar to Apple Music, expanding its business selling concert tickets and finding ways to make money from the company’s trove of data on more than 81 million listeners. The plan is more hype than reality for now. A sale is a less risky path, though it won’t be a windfall for investors who have long hoped against hope.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Pandora says the expenses for music were inflated last year by a legal settlement and other one-time costs.

  2. Excludes long-term marketable securities.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net