Pandora Needs a New Front Man
Poor Tim Westergren. The executive responsible for creating Pandora Media Inc. as an internet-era radio station could have been on top of the world right now.
Instead, investors greeted Westergren's return to the CEO post last year by driving down Pandora's stock price by 12 percent. And Monday, after Recode reported Westergren is about to step down as CEO, shares traded as much as 5 percent higher.
It didn't have to be this way for Westergren. Pandora is the company that did everything wrong. And that left the co-founder with little power to reverse Pandora's fortunes, and perhaps few friends on the board.
The litany of missteps at Pandora started with the years Westergren and the company spent antagonizing the major record companies over what Pandora should pay for the rights to play songs. It wasn't unusual for record labels to be at war with music-related technology companies -- just ask Napster.
But Pandora's stance drove the music companies to embrace rival digital music companies such as Spotify. The labels feuded with Spotify, too, but Pandora should have made nice with the music industry powers while it had leverage as the biggest dog on the digital music block. Now it's not. Spotify, Apple Music, YouTube and even Amazon have become important players in digital music. Pandora is too weak to be a priority to the record labels.
Pandora also limited its option by burning cash for years. Some of that was due to spending more than half of its revenue in fees to the music labels and other parties. The same financial dynamics have helped make Spotify unprofitable. But Pandora contributed to its financial problems with its own missteps such as a trio of ill-advised 2015 acquisitions: concert ticket company Ticketfly, Next Big Sound and the remnants of failed music service Rdio.
Pandora justified the $335 million cash-and-stock Ticketfly acquisition by saying it would be able to identify people listening to Imagine Dragons songs on Pandora and pitch them on tickets to the band's next concert. Next Big Sound was supposed to give musicians information on their digital fans. Rdio was billed as the foundation for Pandora's new kind of music service akin to Spotify, which lets people pick each song; Pandora is more like a radio station in that the company selected the songs.
The strategies sounded valid on paper, but Pandora couldn't afford the deal costs or the distraction of new businesses when its old one wasn't doing so hot. The company had negative free cash flow -- that is operating cash minus spending on capital projects -- of more than $241 million last year. And that wasn't unusual. Pandora has posted negative free cash flow in 10 out of the last 13 quarters, according to Bloomberg data.
The financial weakness and its on-and-off flirtation with a sale finally caught up with Pandora. Westergren was forced earlier this month into an embarrassing capitulation to John Malone's Sirius XM Holdings Inc., which outmaneuvered Pandora with an agreement to buy 19 percent of the company at a typically Malone-like good deal (for him). Sirius plans to take command of one-third of Pandora's board seats and inject a much-needed $480 million into Pandora. The company also struck a deal to sell Ticketfly for far less than it paid, or $200 million.
Sirius is an awkward new part-owner for Pandora. Sirius Chairman Greg Maffei had done everything possible to needle Pandora and drive down its stock price. It worked. The company's shares are 47 percent lower than the $16 at which Pandora went public in 2011. And then Pandora needed its biggest bully to rescue it. It’s not clear whether Westergren may be stepping down because he disagrees with Liberty’s plans for Pandora, or Liberty wanted him out or for some other reason.
BTIG Research analyst Brandon Ross has suggested what sounds like the best option for Pandora now: Sirius should combine Pandora with its satellite radio service plus the Live Nation concert management company and Ticketmaster -- both part of Malone's stable of assets. For sure, such a combination is no sure thing and Pandora's stockholders wouldn't necessarily benefit from the tie-up. But this would be the best outcome for the mess Pandora made.
When Westergren returned as CEO after more than a decade away, he was defiant that he and his team were the best people to run Pandora. That wasn't true. With and without Westergren as boss, Pandora botched every opportunity. And now Westergren's baby is at the mercy of what Maffei and Malone want. That's fitting. It's time to let someone else take Pandora's controls.
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