Although I’ve recently latched on to Sirius XM Radio Inc (NASDAQ:SIRI)‘s , I’ve long been a closet admirer of rival Pandora Media Inc (NYSE:P) — for the music, not the business model. I’m all for supporting the “little guy” or the struggling artists, but when it comes to Pandora’s business model I have my doubts. The company just heightened that fear.
Content can’t both be “king” and free
On Wednesday, in a blog post on its website, Pandora Media Inc (NYSE:P) announced that it is installing a 40-hour monthly limit on anyone listening for free via a mobile device. Those who exceed that 40-hour limit will be presented with several options: to listen on a personal computer, pay a nominal fee of $0.99 for the remainder of the month, or sign up for the ad-free subscription service. According to the company, fewer than 4% of its active listeners will feel the effect.
That’s all well and good, but it’s hard to not see this as the “tip of the iceberg.” More importantly, it continues an issue beyond Pandora’s control — that is, it doesn’t own the content that’s at the center of its business. As such, it has to pay a license fee/royalty to use it. But here’s the problem: These costs keep rising and eating into the company’s bottom line. Recently, there have been myriad articles with writers taking up the fight with some righteous anger.
But is that really what Pandora Media Inc (NYSE:P) needs? Let’s stop pretending it’s a situation where it’s “Pandora (good guy) vs. (bad guy) record label.” Who are we kidding? It’s business. Pandora Media Inc (NYSE:P) knew the nature of this industry when it decided to pursue its model, and investors knew the risks, which Pandora fully disclosed prior to its IPO. Content can’t both be “king” and free. This is what such companies as Netflix, Inc. (NASDAQ:NFLX), with its consistently rising content costs, fully understand.
Perception, reality, execution
Pandora’s perceived dependency on content costs is one thing. Management, however, has a responsibility to sell the strength of its model and seek to continually evolve. Pandora has failed to do this. What it was in 2000 is what it is today. Conversely, Netflix, Inc. (NASDAQ:NFLX) has evolved from a strictly mail-order model to the most dominant streaming platform on the market today. But it wasn’t easy. It had to make some tough decisions to help offset its leveraged balance sheet, for which it paid dearly in massive subscriber losses. Where was the outcry in support? But Netflix, Inc. (NASDAQ:NFLX) recovered.