The more things change at Pandora, the more they stay the same.
The Internet music service lurched out of the Easter weekend with news that its CEO since 2013, digital-advertising veteran Brian McAndrews, is leaving and will be succeeded by Pandora's founder, Tim Westergren.
Shares of typically volatile Pandora belly-flopped about 10 percent on the surprise CEO switcheroo. Westergren hasn't run the company for more than a decade, but he is the person most closely associated with Pandora's technology, which divines musical tastes based on elements of songs or musicians that listeners already like.
While Pandora boasts about the prowess of its unconventional computer algorithms, as a business it's more like conventional Top 40 radio: No matter what, the same tune keeps coming up again and again and again, until you want to drive your car off the road. At Pandora, the tune before, during and after the McAndrews era sounds like this: Pandora is a cool product with many fans, but its business model is based on a hope and a prayer.
Pandora has never been able to solve its central conundrum, which is the more people listen the harder it becomes for the company to turn a profit. About half of its revenue goes to pay for the rights to play songs to Pandora's more than 80 million listeners. Largely because of those music-licensing costs, Pandora has been unprofitable each year since its IPO in 2011.
McAndrews tried to expand Pandora's business into new areas that could help the Internet radio service finally make money. His strategy sounded eminently sensible but was also highly speculative.
"We'll expand abroad beyond Canada, New Zealand and Australia," Pandora said. (If we ever sign contracts with music companies that are required to launch Pandora internationally.) "We'll make money from selling tickets to live shows, and from helping musicians find their fans online!" (Please don't press for details.) "We'll start a subscription music service just like Spotify and generate $1.3 billion in revenue from it in five years!" (If we ever sign contracts with music companies that are required to do so.)
Pandora recently set a goal of reaching $4 billion in revenue for 2020, up from $1.16 billion in 2015. Bridging that canyon relies on believing financial projections for businesses that don't exist yet or are barely off the ground.
In one example, Pandora expects its live events operation including Ticketfly -- a cool sounding idea to help music fans buy tickets to concerts by musicians they discover on Pandora -- can reach $300 million or more in revenue in the next five years. That would mean a big step up for a business that generated a bit more than $10 million in revenue to Pandora in 2015 after it bought it last fall.
The speculative businesses have real costs, which Pandora has to absorb way before the potential payoff is clear. Pandora said developing a Spotify-like on demand music service would cost $120 million before it signs up a single subscriber. That's a big commitment for a company whose operations bled $42 million in cash last year. Because of the costs to nurture fledgling businesses, Pandora said it expected to post a loss before interest, taxes, depreciation and amortization of $60 million to $80 million this year -- a step back from an in-the-black Ebitda year in 2015.
One of the few things that makes stock investors excited about Pandora is the idea of the company being sold. You can almost feel Wall Street wanting to believe in Pandora's potential but not quite understanding how to create spreadsheets from rays of hope. The company's most recent earnings conference call went something like this:
Analyst #1: "So the financial goals you've outlined seem mostly made up. How should we think about that?"
Analyst #2: "On that other speculative number you mentioned: How should we think about that?"
While Pandora is hoping it can make money eventually, music trends are passing the company by as "on demand" music services like Spotify, Apple Music and YouTube erode Pandora's appeal. In the three months ended Dec. 31, the number of people actively using Pandora fell about 0.5 percent, to 81.1 million. It was the first time that number declined, according to investment research firm MKM Partners.
McAndrews and Westergren have believed they can use Pandora's popularity to catapult the company into lasting businesses. But as Pandora loses fans, Westergren is grabbing the baton at a time Pandora is already losing the race and falling even further behind.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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