An Analysis of Pandora’s Rise and Fall (opinion)
Pandora’s valuation as of 1 pm EST today was at $9.50. The stock initially landed at $16 in its IPO in May, which means it just hit its all time low. Am I surprised? No. Was I surprised when Pandora went IPO? Yes.
Not only does Wall Street continues to push Pandora (P) southward, based on a myriad of company-specific and macro-economic concerns (more on this below), but worse, Analyst Richard Greenfield of Pali Research, a huge critic of this stock, is predicting valuations in the $4-$5 range—which is in fact much higher than other analysts who predict it will fall as low as $2
How this happened: A look at Pandora, the Early Days:
Pandora will be remembered as pioneering the art and science of music discovery through The Genome Project enabling users to listen to radio online that just played what you wanted to hear.
Pandora identified a market opportunity in an industry where music flowed freely throughout the web (no pun intended) with file-sharing sites bustling with users, and iTunes taking the rest of the pie.
And yet, while consumers viewed music as a commodity, accessible to download free-of-cost, Pandora saw a cost to users that others were unable to see: That is, the cost of time.
- Piraters would wait sometimes days for their queue of mp3s to download.
- iTunes users would spend an unnecessary amount of time deciphering 30-second song samples to decide where to put their dollar.
- And perhaps the most time-consuming activity of all: music discovery of new music. It was possible, but it was painful
Little did I know at the time, my solution to music discovery, which meant finding iTunes’ user-generated playlists that contained songs I liked to see if they contained new songs I also liked) is a variation of a common method of music discovery, collaborative filtering, made famous by last.fm. Only I was doing everything manually. \
And then came Pandora. A solution that spread instantly across the web by word-of- mouth to music consumers who adopted the service with ease. Pandora was at that time, was dare I say— awesome.
But so were flip phones.
Which leads to why Pandora’s valuation could drop to $2 from $16: Pandora, Today:
What Pandora’s decreasing value means to me, is that we need more scrutiny, and less fluff when evaluating products.
Products need to be evaluated down to each and every feature, employee operation and functional area of the company, from technology to marketing and each’s ability to sustain and scale in as technology continues to spiral out of innovation-control.
And in the case of Pandora’s IPO, in my opinion, someone dropped the ball. Concerns about Pandora’s sustainability are most directly related, in my opinion, to its technology, business model and competitive landscape. Who was looking at these three obvious concerns?
- Technology: Perhaps someone saw innovation when looking at Pandora’s recommendation technology, rather than valuable innovation that can scale and remain accurate with time. And yet, while I’m no Information Scientist my direct experience and three years researching Music Information Retrieval, Intelligence, Recommendation methodologies and the psychology behind music discovery services told me immediately that Pandora’s Genome project would become nothing but stale technology
- Competitive Landscape Pandora’s most direct and threatening competitor, IHeartRadio, just revamped their application. What did they revamp? Its recommendation system. (Plug: Its recommendation platform is made possible by the talented employees that launched ThumbplayMusic (hey that’s me!) right before its acquisition by IHeartRadio). The service has now landed on the iTunes App Store and is equipped with the best recommendation system available.
- Business Model All it takes is a little math to figure this one out. First, Pandora’s expenses (music license fees) are directly related to its revenues, meaning that the ads it sells while people listen to songs, and those expenses, are greater than its revenues. Further, if someone subscribes to Pandora they get the service without ads, so ad revenue and subscription-based revenue constantly cannibalize one another. Finally, music fees are forecasted to rise through 2015. The company has yet to describe how it believes it will become profitable. Right now, Pandora is someone’s interesting hobby. It’s not a business. Or as Bob Pittman would say, “Pandora’s just a playlist on shuffle.
Bonus excerpt from Pittman who was not shy at all about his opinion on Pandora (which also explains the clear advantages its custom radio has over what Pandora has:
Why is your custom radio any different or better than Pandora?
BP: We had the benefit of watching Pandora trying to build a business, certainly they built a nice feature whether it’s a business or not I’ll let everybody else debate. We thought what else can we do to the experience to make it fit better with radio, so we have a slide feature with a range of songs from familiar to discovery with ten times the number of songs Pandora has for example. We have ongoing music research, that we spend millions of dollars for every year, checking what’s hot, what’s moving on, what clusters together. And we’ve written our own algorithms in addition to using some outsourced algorithms.