Pandora Media: dollars and sense

Obsession with user growth can be distracting

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Internet media companies are supposed to deliver two things to investors: user growth and increases in revenue from each user. Provide both, and the result looks like Facebook – its shares are up 120 per cent over the past year. Provide just the revenue, without the user growth, the result is Pandora Media. Its shares have been slashed by a third since March.

Pandora was supposed to be killed by Apple’s iTunes radio – and by Amazon, Spotify, Beats Music and Google, and assorted others. But here it still is, with 76m users, nearly 80 per cent market share in internet radio, and nearly a tenth of the US radio market by listener hours. Three quarters of Pandora’s revenue comes from advertising on mobile devices; about a fifth of revenue derives from subscriptions. The recent wariness of investors stems from the active user count of 77m, which has not budged in six months.

Sales in the quarter just reported were up 38 per cent. And while user growth was sluggish, listening hours jumped 29 per cent, to 5bn. Between March and September 2013, Pandora had experimented with a monthly 40-hour cap on mobile usage to hold down their content costs. But with mobile revenues picking up, Pandora has decided to stop restraining listeners.

Pandora felt bullish enough to raise slightly its revenue outlook for 2014 to $915m. Most intriguing to watch is its progress in local ad sales. Local radio advertising is a $15bn annual market. Pandora’s radio share would imply a $1.5bn opportunity for that, though it recorded just $35m in the second quarter. Pandora now trades at 4 times 2015 revenue, after going as high as 6.4 times earlier this year. When obsessing about how fast users are growing, don’t miss how big or rich the customer pool already has become.

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