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Pandora Media Inc (P), Netflix, Inc. (NFLX): Fantastic Product, Uncertain Profitability

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I have a lot of friends who use Pandora Media Inc (NYSE:P), but I was always confused about a few things regarding the company. Chief among those was monetization. My only interaction with the service was in the very early days before ads, because I listen to podcasts now instead of music. I was aware of the move to ads, but not sure about the effectiveness. I always felt like music was tougher to get on reasonable terms than movies or television.

Pandora Media (P)Fantastic product, uncertain profitability

The great struggle for Pandora Media Inc (NYSE:P) is how much to pay in royalties. As Pandora Media Inc (NYSE:P) become more profitable, content producers have incentives to try and negotiate higher and higher royalties. This is pretty much standard practice and should come as a surprise to no one, but content is very important to Pandora Media Inc (NYSE:P). Consumers want the songs they want. Pandora Media Inc (NYSE:P) needs to provide them or anger its consumers. On the other hand, there are a ton of outlets to get music to consumers.

Pandora Media Inc (NYSE:P) does not really offer the music artists much, except for getting the music to listeners that might eventually buy them, and perhaps introducing listeners to new musicians that they will like based on their tastes. For listeners, Pandora offers one of the best recommendation systems out there. That gives artists little incentive to play ball. It would be different if Pandora was the Google of internet music radio, but there are a lot of players in the market and Pandora is not the most powerful.

Even a company like Netflix, Inc. (NASDAQ:NFLX) has a problem getting content. When streaming was first launched on Netflix, Inc. (NASDAQ:NFLX), Starz was a partner. Starz content was available on streaming, but the two companies were unable to come to a renewal agreement as streaming started taking off. Streaming was the next big thing, but monetization was a problem.

Commercials are not really a part of streaming on demand, though I think the benefit of having content when you please warrants watching some ads. Netflix, Inc. (NASDAQ:NFLX) will have to do something more than just rely on more subscribers and price increases to create more profit. Monetization is just as important to Netflix, Inc. (NASDAQ:NFLX) as Pandora.

The massive loss of content came as a surprise to many Netflix, Inc. (NASDAQ:NFLX) subscribers I told, and that worries about subscriber numbers and growth, which have driven the share price to its current levels. I will come out and say I will not subscribe to Warner Archive Instant, because this fragmentation of streaming is annoying. Netflix, Inc. (NASDAQ:NFLX), Redbox, and Amazon can offer content from many different companies that compete with one another.

Pandora’s revenue is rising. More revenue means that the company can increase its content offerings and further increase revenue. The more hours people listen to the music, the more Pandora has to pay, and the more it can make off advertising. The company is in its growth phase right now, so it is not the time to be looking for profits, but future profitability will be dependent on an accord with artists or whoever represents them. Pandora does have the chance of getting into a strong bargaining position one day.

Mobile is the key for the company now. It recently capped mobile users at 40 hours a month, but I think this is still too low. The company stated it only affects 4% of users. I think the limit might affect a greater number of users and they should offer a nicely priced plan to expand this amount.

Forty hours is a lot of music, and a lot of that is probably repeats on the same channels. Pandora is primarily a recommendation engine, not a radio. It does not even have the largest library of songs since the music is coded manually for feeding into the music genome algorithm. They are transitioning to being like radio, but with the smallest library they will always lag.

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