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.
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.
The company needs to focus on monetizing their listeners aggressively, but within reason. If that drives people to other companies, then it probably means that the laborious nature of Pandora’s music cataloging is not ideal. I have too many questions and not enough answers about both Pandora and Netflix, Inc. (NASDAQ:NFLX). The crazy movement of Netflix’s stock scares me, especially considering the loss of titles. I am not sure about Pandora’s long-term potential yet, so I turn to another company in the field.
New-ish radio
Sirius XM Radio has come a long way from the sub-$1 days. Back then, I read a lot of articles talking about subscriber growth, though there were still naysayers calling for the doom of the company. It was a very emotional time and the message boards were war zones.
Since then, Sirius has risen a lot and has become profitable. Reading the earnings report, the company is even boasting about free cash flow, which is a great sign. If free cash flow is consistent, then it can fuel growth through operations and not by tapping the balance sheet or new investors.
Things sound all well and good on the earnings conference call, but all the stats do not need to be rehashed. I think Sirius is one of the few companies that can benefit from a share repurchase, and in December it announced a $2 billion repurchase plan. It should be able to take quite a few shares off the market.
The P/E ratio is pretty low, and revenue is increasing though EPS remains flatter. Focus on the free cash flow and the share repurchase. The company announced it in December but does not seem to have started it, and the price could rise once shares are actually bought.
January 2014 $4.00 calls are cheap at $0.12, if the company starts buying its stock it could push the price upwards. Might be worth a shot. For reference, when I wrote the first draft of this article, the calls I mentioned were at $0.04, so they already made a lot. I wish I’d been quicker but I still have no position.
Conclusion
Pandora is music, and it probably will not expand into any other type of service. Music is an extremely competitive field, and it seems hard to extract more value from Pandora’s consumers to justify the difficulty of its business model without driving listeners to competitors.
Netflix has lots of different kind of visual content, and I do not think the more concurrent streams plan will be a long-term solution to growth, nor will tapping international markets. Netflix is putting off commercials as long as possible, but if it wants to keep its revenue increasing without raising prices, it needs to have them. The stock tends to knife back and forth making it stressful to own, because when bad news hits, it could just collapse.
Sirius is doing a significant share buyback, and is seeing its business grow. Earnings consistency is not there yet, but if it can stabilize earnings into regular growth like revenue, the share price would probably soar compared to the $3-range it is in right now.
The article Content Delivery Companies Are Not Created Equal originally appeared on Fool.com and is written by Nihar Patel.
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