The Beginning of the End for Pandora Media Inc (P)?

Investors in Pandora Media Inc Media (NYSE:P) largely ignored the previously-anticipated unveiling of Apple Inc. (NASDAQ:AAPL)’s iTunes Radio service on Monday. Most articles written on the topic consider iTunes Radio a non-event for Pandora, simply because the key functionality of iTunes Radio largely resembles Pandora’s existing services. While there may not be a must-have feature that will make iTunes Radio the “Pandora killer” some expected, the added threat to Pandora Media Inc (NYSE:P)’s already shaky business model should not be dismissed.

A pioneer in streaming music

Pandora Media Inc (NYSE:P) is among the pioneers in streaming Internet radio. The business model is simple: Pandora offers a free, advertiser-supported radio service and Pandora One, an ad-free service available for $4 per month or $36 per year. The ability to listen to Pandora on virtually any connected device (including computers, mobile devices, and home entertainment devices) and create and refine customized stations has attracted over 70 million active users to listen to Pandora over a billion hours a month. In the most recent quarterly results, Pandora reported revenue growth of 55%. With such strong revenue growth and users and hours listened increasing by 33% and 22%, respectively, over the prior year, this would seem to be a healthy business. However, a deeper look indicates otherwise.

Unprofitable business model

Even with staggering growth rates and an increase in market share to over 7% of the radio listening market in the United States, Pandora Media Inc (NYSE:P) hasn’t come close to profitability. The company reported a net loss of $29 million during the most recent quarter and continues to burn cash through negative cash flow from operations (as well as negative free cash flow). This chart shows just how disconnected Pandora’s top line growth and profitability are:

P Revenue Quarterly data by YCharts

Content acquisition costs have continued to surge and equate to 66% of revenue in the most recent quarter. Spending two thirds of revenue just to acquire music rights does not exactly leave much room for software development, marketing, and employee costs.

There is already plenty of competition

Even before bringing iTunes Radio into the discussion, 93% of radio listeners use a service other than Pandora Media Inc (NYSE:P). Listeners seeking free, advertiser-supported radio options listen to traditional over-the-air AM and FM radio stations, HD radio, or free streaming services such as iHeart Radio. The premium radio market is dominated by Sirius XM Radio Inc (NASDAQ:SIRI), whose satellite radio services (and optional streaming service) include premium sports, news, and celebrity content.