Pandora Falls on Spotify's Paid User Growth - Analyst Blog

Pandora Inc.'s P competitor Spotify recently announced that its paid subscriber base has reached 10 million globally. Total subscriber base reached approximately 40 million. The news dragged Pandora's share price by 1.20% (30 cents), which closed at $24.73 on May 21, 2014.

In just a little more than 12 months, Spotify added 16 million total active users and 4 million paid users as it expanded its service to 28 new markets. In December last year, Spotify launched its free service for Apple's AAPL iOS and Google's (GOOGL) Android, which is a key reason behind its overall user base growth.

However, Spotify's active user numbers are expected to put Pandora under further pressure in the near term. Although Pandora's active user base ($76.0 million at the end of Apr 2014) is far higher than Spotify's, the latter's fast growing user base is a major concern.

Additionally, Apple's plan to acquire Beats Electronics will further intensify competition for Pandora in the ad revenue market. Pandora earns about 73.0% of its revenues from advertising and is relying on the revenue stream to offset its large content acquisition costs. Pandora grew its advertising revenues 45.4% in the first quarter to $140.6 million.

With an eye to enhance and diversify its revenue stream in the near future, Pandora is extending its footsteps into various new spheres. Recently, the company launched its new music recommendation unit called Promoted Stations.

The new unit will feature sponsor-branded listening stations whereby Pandora will receive some payments from these brands for advertising their respective stations. In Mar 2014, Pandora partnered with Peet's Coffee to create four branded stations that provide the soundtracks in Peet's stores.

We believe that promoted stations 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's initiative of launching in-car advertising is a major positive in this regard. The company's partnerships with major car manufacturers such as Ford Motor F will provide it a significant ad revenue growth stream.

Nevertheless, we believe that Pandora should focus on growing its paid subscriber base at the same time, as it will provide a steady revenue base amid rising competition. However, the company's move to raise ad-free subscription price may result in a higher churn rate in the near term.  

Currently, Pandora has a Zacks Rank #3 (Hold).