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Pandora Media Inc (P) Just Admitted Its Business Model Is Broken

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The rise of streaming both video and audio has been nothing short of amazing. Services like Pandora Media Inc (NYSE:P) and Spotify allow their users to listen to thousands of songs for free. While Pandora specializes in radio, and Spotify specializes on playlists, each service offers a lot of value to the end user. By the same token, services like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN)’s Prime service offer unlimited video streaming for a relatively cheap price per month. The days of users having to keep megabytes and gigabytes of music and video on their computer could soon be over. This sounds great, but one of these companies has a major problem with its business model.

It’s a bit ironic, don’t you think? It’s ironic that Pandora Media Inc (NYSE:P) is the name of this company. Pandora’s Box released the evils of the world, Pandora the company has released costs that it can’t contain. The service sounds great, the company provides a customized set of radio stations, and advertisements or a subscription offsets the company’s cost.

There is just one big problem. Pandora Media Inc (NYSE:P) is required to pay a royalty every time a song is played. With the vast majority of the members using the free service, this means the company must grow its advertising revenue faster than the growth in listening hours. However, listening hours and content acquisition costs have been outpacing revenue on a regular basis.

Sirius XM is competitor in the radio business with a different model. Sirius customers are largely paying subscribers. In addition, while Spotify and Pandora Media Inc (NYSE:P) can work in a vehicle with a bluetooth or other connection, Sirius is built into many new vehicles. Since Sirius uses satellites instead of an Internet connection, customers can use the service without having to worry about how much of their wireless data plan they are using.

On the video side of things, Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) have a model that is more sustainable over the long-term. Netflix pays a flat amount for the rights to a series or movie, and then makes money by signing up more paying members than the cost of their investment. In theory, Netflix, Inc. (NASDAQ:NFLX) pays for content, signs up new members and makes money.

Amazon.com, Inc. (NASDAQ:AMZN) Prime offers a similar service, but with an added kick. Amazon of course offers unlimited video streaming, but also hopes to sign up members who will buy more from the company because of the kicker of free two day shipping.

Here’s why the distinction is so important On the one hand, you have companies like Pandora Media Inc (NYSE:P) and Spotify offering services that logically can’t make great profits. Pandora reported they are, “effectively the largest radio station in almost every major market.” When you are already the largest player and you still can’t generate a profit, there is something wrong. Pandora expects that over $600 million in revenue might make earnings come in at $0.05 per share, and this is the best case scenario.

Membership doesn’t seem to be the problem. According to Pandora there are, “tens of millions of people in the U.S.” that listen to Pandora. Considering that Sirius has about 24 million subscribers, Netflix, Inc. (NASDAQ:NFLX) is getting close to 30 million, and Amazon.com, Inc. (NASDAQ:AMZN) Prime reportedly has at least three to five million subscribers, Pandora Media Inc (NYSE:P) is by no means dealing with a small audience.

It doesn’t seem that revenue growth is the issue either. The company reported revenue up 54% in the current quarter, and mobile revenue grew even faster at 111%. With top line revenue growth of 24.1% expected from Amazon.com, Inc. (NASDAQ:AMZN), 18.3% from Netflix, Inc. (NASDAQ:NFLX), and 11.90% from Sirius, Pandora is outpacing them all.

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