Despite its position as the leading Internet radio service, Pandora’s history as a public company has been a turbulent ride for investors. Shares came public in June 2011 at $16 per share, before losing more than 50% of their value to $7.08 in November 2012. Concerns over the launch of iTunes Radio by Apple Inc. (NASDAQ:AAPL) pushed the stock to all-time lows.
Headline risk has been the dominant theme for Pandora shareholders. The stock has ebbed and flowed like the ocean tide, depending on the latest news flow.
Fast-forward to the present, and Pandora Media Inc (NYSE:P) reached an all-time high of $20.54 in early July. Investors are choosing to ignore the obvious issue that competitors Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) are launching their own music services, giving full confidence to Pandora’s monthly listener figures, which indicate a burgeoning subscriber base.
I’ve written negatively on Pandora time and time again, citing the company’s inability to turn a profit and monetize its listening hours. Royalty costs have been rising at a faster rate than advertising revenue. New listeners will only exacerbate the problem, not resolve it.
A new concern
My current article is dedicated to a new and overlooked element: the Pandora Radio user experience. Few on Wall Street have commented on Pandora’s decision to roll out numerous “software improvements” to its radio service. These updates have made little actual improvement; instead, the overall user experience has declined dramatically.
The recent actions of Pandora Media Inc (NYSE:P) are a huge game changer for investors, and a negative one at that. Hidden within the bug fixes and performance enhancements is a dramatic increase in advertising and a decrease in listening options. The company appears to have reached an ultimatum with its free listener base, which is unwilling to pay $4 per month for a premium radio service.
Faced with rising royalty costs, Pandora made the decision to abandon its traditional model and deliver a massive advertising increase to its customers. Listeners are faced with a 15-second or 30-second radio advertisement as frequently as every 2-3 songs, compared with 5-6 songs in recent past. Free radio listeners can no longer skip through multiple songs; instead, you are required to listen to the current song or switch to a different radio channel altogether.
All in all, the originality and flexibility which attracted millions of users to Pandora Radio appear to be waning. Listeners are now faced with more advertising on Pandora’s Internet radio than with a traditional radio broadcast.
Can Pandora attract quality advertisers?
A potential reason for the rapid increase in advertising volume is Pandora’s inability to attract quality advertisers. There are several explanations for this, including an inadequate ROI for brand-name corporations that took a stab at Internet radio. The math is simple–if Pandora cannot attract advertisers at a respectable premium, the company is forced to balance supply with demand by lowering its advertising rates.
Listeners are now faced with advertisements to download the latest game craze for their iPhone or Android devices, instead of credible advertisers that bring legitimacy to the Pandora platform. Discount carrier Southwest Airlines Co. (NYSE:LUV), the University of Phoenix (owned by Apollo Group), and Universal Pictures (owned by Comcast) are among the few respectable advertisers in a pool of ads to download the latest smartphone game.
