Pandora Media Inc (NYSE:P) hit a fresh all-time high on Thursday after the company announced new CEO Brian McAndrews. Now, with a market cap over $4.25 billion, and countless questions surrounding licensing, profits, and competition, investors might be have less optimistic days ahead.
What’s so good about McAndrews?
Honestly, not much. McAndrews has essentially zero experience in the music industry. He’s an advertising guy; he was the CEO at the digital marketing company aQuantive, which was bought by Microsoft for $6.3 billion in 2007.
Unfortunately, Microsoft has since written off most of that acquisition, leading some to suggest that McAndrews’ aQuantive wasn’t as effective as advertised. Either way, it’s rather hard to find the connection between McAndrews and Pandora Media Inc (NYSE:P), and its near $400 million in added market capitalization since he was announced as CEO.
What about royalties?
Personally, it would have been nice for Pandora Media Inc (NYSE:P) to hire someone with some level of experience in the music industry. Because right away McAndrews is going to have to battle the music industry on royalty rates that Pandora pays for each song .
Currently, Pandora Media Inc (NYSE:P) pays a fraction of a penny (0.12 cent) per song played, equaling over $200 million last year to the music industry . Seeing as how Pandora continues to grow, and new competition has emerged, it appears as if the music industry has more leverage than ever before to battle Pandora Media Inc (NYSE:P) for higher rates.
For a company that’s already having a tough time in producing a profit, higher costs could be crippling.
What about profits?
Next, what about profits? During the company’s last quarter revenue growth of 58% year-over-year was spectacular! However, a common trend is that spending outweighs revenue growth. In particular, sales/marketing costs were up 95% to $46 million.
In theory, a company is being efficient when revenue growth outshines both research and development and selling, general, and administrative costs year-over-year. For Pandora Media Inc (NYSE:P), this is simply not the case, and they have been unable to prove that profitability can be a part of their long-term future.
In comparison, Sirius XM Radio Inc (NASDAQ:SIRI), who is a major competitor, has operating margins of 26.6% over the last 12 months, compared to 23.7 % in 2012. While Pandora is growing faster, part of their problem is making inefficient investments.
Sirius XM Radio Inc (NASDAQ:SIRI) has a return on equity of 13.23 %; Pandora’s return on equity is negative 53.5%! While the company does have certain operational costs that can’t be ignored, Pandora must be make better investment decisions if they are ever going to see profits like Sirius XM Radio Inc (NASDAQ:SIRI), or reward investors with Sirius-like gains.
What about the new guy?
Speaking of competition with Sirius XM Radio Inc (NASDAQ:SIRI), Pandora is also facing new competition from this little company called Apple Inc. (NASDAQ:AAPL). For Apple Inc. (NASDAQ:AAPL), iTunes Radio is another piece of iOS ecosystem. Even if Apple Inc. (NASDAQ:AAPL) has great response to their $24.99 a year iTunes Match feature, and strong advertising revenue, it’s hard to imagine a scenario where this one service is fundamentally impactful to a company that’s earned nearly $170 billion in revenue over the last 12 months.
