I Love Pandora Media Inc (P), but This Company’s Singing the Blues

Today, Netflix’s strong domestic and international growth offsets fears of rising costs. It is viewed as an infrastructure under construction. Likewise, Sirius XM battled these same issues. In fact, Sirius had it much worse during a period when the entire economy was in the toilet. However, Sirius kept the fight going. And it ultimately benefited Pandora and other companies such as Spotify when Sirius received a favorable ruling against SoundExchange, the organization that collects royalty payments for musicians.

As Fool contributor Rick Munarriz recently discussed, the ruling, which is very favorable to Sirius, only increases the royalty payments by 1% this year and by only half of a percent every year after until 2017. This makes it very cost friendly since Sirius passes these rates on to subscribers, which is the cable industry’s model. And it’s the only thing to keep the bottom line from bottoming out. The most successful companies know how to do this in the least intrusive manner. Besides, let’s not act as if Pandora is some charity. It’s in business to make money.

Facing the music
Unfortunately, if recent guidance is any indication, songs have been sad and things aren’t looking so bright. After beating Wall Street earnings-per-share estimates by $0.04 in the third quarter, the company guided for a fourth-quarter loss of $0.09, while citing fiscal cliff concerns. On the news, the stock plummeted 20%. But was that the end of it? Granted, the possibility existed that advertisers were avoiding making long-terms commitments to Pandora while waiting for a resolution. But to go from a plus $0.04 EPS to a negative $0.09 is a pretty meaningful spread.

However, the cliff was averted, so where does Pandora stand now? The company’s been mum on this issue. . And, based on the advertising guidance given by Google Inc (NASDAQ:GOOG), companies are looking to spend more. So while I applaud Pandora for realizing that it can offset its costs by impacting fewer than 4% of the listenership, the move diminishes my confidence in an already shaky model. This is the reality. Pandora needs to face the music and gradually alter the ratio of ad-driven revenue to subscription, for sure, and this can’t happen soon enough.

The article I Love Pandora, but This Company’s Singing the Blues originally appeared on Fool.com.

Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Netflix.

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