Pandora's New Promoted Stations - Analyst Blog

Recently, Pandora Media Inc. P launched its new music recommendation unit called Promoted Stations. This new unit will feature sponsor-branded listening stations whereby Pandora will receive some payments from these brands for advertising their respective stations. However, the monetary details of the deal have not been revealed.

Taco Bell YUM, Diageo's DEO Crown Royal, Skechers SKX and Sonos are among the 10 brands that have already signed for the program. However, currently this initiative will be available to only 10.0% of Pandora's roughly 75.0 million monthly listeners.

The functioning of the Promoted Stations will be very easy to follow. The stations operated by the brands will appear at the top of Pandora's “Stations You Might Like” window, which in turn bears a strong resemblance to Twitter's TWTR “Who to Follow” box.

However, Pandora still has not figured out the details regarding the targeted listeners for these branded stations. Neither has the pricing of the stations been finalized.
 
Pandora earns about 80.0% of its revenue from advertising and is relying on the revenue stream to offset its large content acquisition costs. The company grew its advertising revenue by 45% in the first quarter to $140.6 million.

With an eye to enhance and diversify its revenues in the near future, Pandora is extending its footsteps into various new spheres. In Mar 2014, Pandora partnered with Peet's Coffee to create four branded stations that provide the soundtracks in Peet's stores. This happened to be the company's first initiative to extend its listening service into a retail space of any sort.

We believe that this newly-launched feature will work especially well on mobiles, which approximately account for about 80.0% of Pandora's overall listening and 74.0% of the company's last quarter revenues.

Pandora enjoys a first mover's advantage in the music streaming industry. Pandora's already popular service driven by its effective discovery engine and well established infrastructure will boost its listener base in the near term.

Moreover, Pandora's initiative of launching in-car advertising is a major positive in the long run. The company's partnerships with major car manufacturers such as Ford Motor Co. F will help it to launch the service in more than 130 models. Moreover, it also has partnerships with Taco Bell, BP and StateFarm.

However, rising cost of licensing music remains a major concern in the near term. We believe Pandora's move to raise ad-free subscription price may result in a higher churn-rate in the near term. Further, intensifying competition from the likes of Apple AAPL, Sirius XM SIRI and Spotify remains a major headwind.

Currently, Pandora has a Zacks Rank #4 (Sell).