Pandora Has A Global Opportunity: Here's How It Can Take Advantage

• In a report issued Thursday, Detwiler Fenton analyst Alex Arnold took a look into Pandora’s content deals and the crossing of borders.
• According to the note, “Checks suggest an overhaul underway for Pandora, content licensing potentially opening a global opportunity.”
• So, let’s take a closer look at the experts’ comments.

In the past, Detwiler Fenton analysts have pointed out problems with Pandora’s model, noting however, that, “there is a potential path to prosperity for the company with some changes to the business.”

They explained that one of the main elements that they see holding back the company is “its reliance on an old set of laws meant for broadcast radio stations that it uses to reduce content costs.”

There are two big problems stemming from this positioning:

First off, that the company is not being able to access newer, more in demand content. In the second place, that it “has been limited to operating in the US, as the provisions of the aforementioned laws on which it depends are domestic.”

The dilemma here is that Pandora “has limited upside potential to grow in the US and the nature of its business is tough to monetize through advertising.”

Experts at Detwiler Fenton noted in the past that, “the company will need to ink content deals with the major labels regardless of how old the content it wants to play is in order to grow beyond the borders of the US.” On the flip side, labels will probably want license deals for the US too, “and require some level of minimum guaranteed payment.”

Moreover, they noted, the recently announced Rdio deal could serve as a first step towards this potential expansion and also as “recognition that on-demand may be of greater interest to today's listeners than broadcast.”

Regardless, they continued, offering both is likely to be positive. However, what should they do with these assets? Well, that’s another question.

On the bright side, it seems like Pandora has “finally realized that content does not want to be free,” Arnold continued. “Recent checks suggest that the company has finally been out exploring signing up content rights with major players in the music industry.” And, the research firm believes this is the only direction for the company. However, the expert explicates, this will also probably –dramatically- change the economics of its business.

The analysts would expect that “any deals that come out of this process will involve minimum guaranteed payments, putting Pandora in a similar position as Spotify,” the report assured. And that will probably not be cheap.

So, to assess the viability of this course, the expert went on to look into Pandora’s balance sheet, which counts with roughly $350 million in cash. According to Arnold, as much as half of this cash could be spent in licensing; “and then there’s the cost of scaling globally,” he added.

In conclusion, the analyst explicated that “The overall result to the changes that need to be made may be an extension of the path to profitability and a need to scale the business in order to make this happen.” While there may be some risk involved in this move, the firm sees it as “being the only choice;” so they “hope management follows through and begins to shift the model.” Having said this, nonetheless, they are still “not sure how investors would react should such an overhaul be undertaken.”

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.