Pandora IPO Drawing a Mixed Set of Listeners

While news of Facebook’s plan to go public in early 2012 stole the headlines in the IPO market today, some investors are still listening closely to news surrounding Pandora Radio. The Internet-radio broadcaster plans to make its debut on public markets this week, and according to filings with the SEC will offer 16.88 million shares at $10-12 per share, giving the company a market cap of over $2.1 billion. Pandora will trade under an austere one-letter ticker symbol, “P.”

The forthcoming Pandora IPO is a revolutionary step for Internet Radio companies, as the Oakland-based business is the first of the litter to try its hand in public trading. The most similar companies to Pandora to IPO in the last decade have been Sirius and XM satellite radio (NASDAQ:SIRI), and both crashed and burned after riding slightly higher out of the gates, leading to an eventual merger.

While Pandora has an advantage over these service providers in that it does not face the excessive fixed costs of satellite radio providers, nor the outstanding sums of liability Sirius levied on itself in contracting radio jockeys (they paid Howard Stern $500 million over ten years, before they had a net income), there are steep costs to competition in the music industry that fall outside the veil of the public eye. These costs have some news outlets clamoring for investors to avoid the Pandora IPO like the plague.

Don’t Go Near It!

One source to come out swinging heavily against buying into the Pandora IPO was MarketWatch. In a column yesterday, tech specialist John Shinal broke down the situation for investors, arguing that it makes no sense to buy Pandora because the company is far from being currently profitable.

According to Shinal, “In the 12 months ended Oct. 31, 2010, Pandora paid out 49% of its revenue to license the music it sends to listeners via its customized, online radio channels. [This shows]┬áThat Pandora is consistently paying about half its revenue in license fees, or nearly double the 25% figure that was part of the agreement, provides a pretty clear indication of which party got a better deal.”

Shinal writes that Pandora is a dubious buy because it has no sustainable revenue sources, and has yet to even come to terms in licensing agreements with Performing Rights Societies such as ASCAP, which the company is legally obligated to contract if it hopes to be able to play copyrighted sound recordings on the radio (every song out there).

Another party in the “don’t buy” camp is Business Insiders’ Pascal-Emmanuel Gobry. Gobry writes, “The opportunity for Pandora is to grab a pie of the $13 billion radio advertising market. But… that’s unlikely. First of all, while Pandora now carries fewer ads per hour than traditional radio, its userbase will probably rebel (and competitors lure them) if they increase that too much. More importantly, most radio ads are local ads, and Pandora would need a huge local sales force to grab a share of that pie, and it doesn’t have that… Of course, content costs are eating Pandora alive. 50% of Pandora’s revenue goes right back out the doors to public labels.”

Get in While You Still Can!

One writer for the San Francisco Chronicle has a more favorable opinion of the upcoming Pandora IPO. Benny Evangelista argues that the growth potential for this company is profound, saying, “Pandora… has more than 90 million registered members, up from 31 million in 2009. Of the total, 34 million tune in at least monthly to their personalized stations, which stream songs categorized by artist or genre over the Internet to personal computers and mobile devices….It is one of the few survivors of a cadre of digital music startups once part of a local “Audio Alley… A┬áreport by research firm eMarketer Inc., which predicts there will be 157.8 million weekly Internet radio listeners by 2015, said “the growing popularity of Pandora, coupled with the expected arrival of Spotify, could tip the balance [in favor of internet radio] sooner rather than later.”

Bear or Bull?

As an early investor in Sirius (NASDAQ:SIRI) I was stung by the illusory promise of a game-changing radio company. In the age of a social media society driven by mobile devices I think the idea of the “radio” station is a technologically obsolete. I will concede that Pandora may hold some promise in its ability to successfully integrate itself into user’s tech-connectivity, but in terms of an IPO buy recommendation I think the company has a long way to go before it becomes profitable, on a balance sheet, or in terms of shareholder value. Having posted net losses of over $25 million in the last two years, and subject to the whims of a music industry that needs to find new streams of revenue due to the proliferation of digital piracy, my outlook on Pandora is bearish in the short-term. Save your IPO money for Zynga.