As a leader in online radio, Pandora Media Inc (NYSE:P) has done a remarkable job of revolutionizing the way listeners consume music. The company makes use of a proprietary algorithm that analyzes songs based on 450 different attributes, and in conjunction with a collective feedback process from listeners (data points from listeners giving a “thumbs up” or “thumbs down”) to serve personalized songs, in the form of playlists, to listeners. Anyone who has used Pandora Media Inc (NYSE:P) knows how good its algorithm is: not only is the website a fantastic place to listen to music for free, but it is also an interesting way to discover songs that fit a listener’s taste in music nearly perfectly.
Pandora Media Inc (NYSE:P) currently derives its revenues from advertisements and subscriptions. Listeners can listen for free and put up with advertisements or pay $36 for an annual premium subscription. Thanks largely in part to the viral nature of the free business, the company now has over 75% of the internet radio market share, in terms of listening hours. iHeartRadio is the next closest in terms of share, with about 10% of listener hours, and the remaining 15% is split between smaller providers such as Cumulus Internet Radio and CBS Internet Radio.
That’s about where the good news ends. While Pandora Media Inc (NYSE:P) offers a good product, its business model doesn’t work. The troubles started in 2012 when the music industry fought against the company for playing music and not paying enough fees to those who held the rights to the music. As a result, the Internet Radio Fairness Act was passed by Congress in attempts to ensure fairness in the amount of revenues that accrue to internet radio companies (Pandora Media Inc (NYSE:P)) and satellite radio companies like Sirius XM Radio Inc (NASDAQ:SIRI). The cost of music has been a nagging issue for Pandora Media Inc (NYSE:P) ever since, and the company loses more than 50% of its revenues to royalty payments. Today, thanks to content costs, Pandora’s current business model has limited operating leverage and scale. While most investors are focused on analyzing the company’s listener hours’ growth, these sky high content costs are also largely driven by listener hours.
Whatever happened to Sirius XM Radio Inc (NASDAQ:SIRI)?
In the world of streaming music, the other large player that comes to mind is Sirius XM Radio Inc (NASDAQ:SIRI). Sirius XM Radio Inc (NASDAQ:SIRI), a satellite radio operator with more than 170 channels dedicated to providing music, sports commentary, comedy, and other forms of broadcast for the US and Canadian markets, had over 24.4 million subscribers (in comparison to Pandora’s 125 million users) at the end of the first quarter of 2013. Sirius XM Radio Inc (NASDAQ:SIRI) charges up to $17 per month for unlimited songs.