Why Everyone Is Wrong About Pandora (Or — Who Should Buy Pandora)
Yesterday, the NY Times broke a story that Pandora was entertaining the sale of the company. The story goes on as expected: the company is down $7B in market cap, it is bleeding money, its monthly active user base is dropping, it can’t convert users to paying subscribers, its economics are (and were never) any good, and it can’t grow fast enough to keep up with ever increasing cost of providing the service.
Read a little deeper on blogs and news services and you get a few more comments on how they tried to diversify (the mystifying purchase of Ticketfly for $450M) and failed — and ultimately who the buyers will be.
Out trots the usual suspects:
Google, Apple, Amazon, Samsung, and iHeartMedia
I believe these are all wrong — and that people are missing the bigger opportunity with Pandora
Let me digress for minute or two
For years, the music industry has existed as a wholesaler. Musicians made deals with record labels, record labels promoted the music to radio stations and sold physical product to retailers, and guys like Clear Channel (now iHeartMedia) played the songs and guys like Tower Records or Wal-Mart sold those albums.
Artists had no direct relationship with their fans, and neither did the radio stations which played the music, nor really did Wal-Mart or Target.
Artists primary revenue came from the sale of physical music with the occasional tour thrown in.
With the advent of digital distribution — E-music, iTunes, Napster, Panroda, Spotify, etc…. the paradigm has shifted. Consumers no longer buy music, and artists main source of revenue tends to be live touring.
Artists are still wholesalers, with record labels making deals with Pandora (through Sound Exchange) or Spotify (directly more often than not) allowing those services to offer up music with a degree of rights attached (radio service in the case of Pandora, all you can eat track on demand in the case of Spotify, Deezer Tidal and a few others)
They are also wholesalers when it comes to live touring. Artists make deals with Live Nation (and others but Live Nation is the largest producer of touring in the world) and they, in turn, send the band out on the road. Ticketing is generally done through Live Nations’s sister company — Ticketmaster — and artists generally speaking have no idea who is in the audience on any given night.
Imagine spending a year on the road and selling more than $100M in tickets — and never knowing who you are playing for.
That’s the world that Taylor Swift lives in.
Given this paradigm shift to live over recorded, I believe that the best buyers of Pandora actually fall into two camps: ticketing companies and the artists themselves.
Primary ticketing is an okay business — but secondary ticketing is an excellent business.
Look at the recently broken out results for StubHub in the Ebay quarterly filings and you will see a business with a robust top line and a 20% EBITDA margin. There’s a reason Ticketmaster is trying hard to merge primary and secondary markets with its TM Plus product, and a reason why a private equity firm was willing to value the 3rd or 4th biggest secondary player (Vivid Seats) at over $800M.
By systematically underpricing — or mispricing — tickets, artists leave a ton of money on the table and like any good marketplace, arbitrageurs appear to take advantage of the opportunity. There’s a whole other article to be written about why artists allow this to happen — but suffice it to say that it exists and is a very big market.
Now Pandora has almost 250M registered users, and 80M monthly unique users, and a trove of data with over 10B pieces of preference data in it. If I were a ticketing company — particularly one with 20% EBITDA margins — how many incremental tickets would I have to sell to make up the $2B market cap of Pandora? Could I do a better job target marketing to an audience? Could I do a better job of producing tours/. Routing tours? Selling merchandise? Partnering with artists? Do a better job than Live Nation/Ticketmaster is currently able to do given their data set?
The answer to all of these questions is an emphatic yes.
Pandora realized some time ago that they were not necessarily a music company, but a data company and started down the road to fix the problem. They bought (okay they overpaid for) Ticketfly to get into the business — not realizing that Ticketfly generally served the extreme long tail of their listener base as opposed to doing a deal with StubHub or Ticketmaster or Ticket Network or Vivid — all of whom serve the short (well maybe medium length) head which represents the bulk of the Pandora listening. Pandora is, first and foremost, a competitor to traditional radio, and so the listening habits of its users are typical of US Radio. Thus, Taylor Swift and Kanye figure heavily in the rotations, but Ticketfly does not serve them. Who makes money off of Taylor Swift and Kanye? That’s right, Ticketmaster and Stubhub.
These are your best buyers of Pandora for sure — as they have a business model which allows them monetize the listener preference data and do so in a geographic way — mimicking the economics of touring — which is the only really profitable part of the music business left (outside of licensing which is locked up with the labels)
Here’s a more radical concept: recreate United Artists
United Artists was created back in the early 1900’s by Charlie Chaplin, Mary Pickford, Douglas Fairbanks and D.W. Griffith — as they were highly popular and thought they were being taken advantage of by the middlemen who essentially employed them.
Look at the primary cost of operations for Pandora — it is royalties to Sound Exchange, which get distributed out to artists (minus plenty that goes into administration and to record labels). In 2015 Pandora paid over $600M to Sound Exchange for the pleasure of playing music.
What if artists banded together and opted out of Sound Exchange, and instead decided to take their future royalties from Pandora and put them to use buying out the company? All of a sudden Pandora doesn’t have a business problem anymore. In fact they make $500M per year. And the artists now have a direct relationship with their fans — something that all of them want — but none of them have.
Of course you would have to have great systems in place (insert shameless plug for Fan Manager — an awesome marketing automation solution for fan based businesses thatI have the pleasure of being on the board of) and have professionals running it. But imagine if a mid level touring act (forget Rihanna — she can sell out anywhere) was able to see where exactly their fans were located, and speak with them directly to see if they were interested in tickets to a show. You would have more sold out shows, better flow to tours, happier artists and more satisfied fans.
It’s a radical thought — but Jay Z and company are trying it with Tidal — problem is, Tidal has no user base to start and is all premium. Pandora has all the users, a better playlist creator than anyone else (sorry Echonest — now part of Spotify — just my opinion, but they just have way more data and a 5 year head start) and is on every mobile device.
So what of the usual suspects?
Google is always spoken of, but has never made a real move into music, and has had the opportunity to buy Pandora more times than you can shake a stick at — so why now? Apple is similarly burdened. With Apple Music they have momentum finally, and the $3B they paid for Beats will likely deter them from spending another $3B on Pandora. Amazon is perhaps the most interesting of the usual suspects as they have no momentum — but their goal seems to be to sell stuff — so it seems pricy unless it came with a larger ticketing component. iHeartMedia makes sense — but they have balance sheet issues and the VC’s who still largely control the big blocks of Pandora aren’t going to take stock in a company that is likely to remain private or go through a restructuring. Samsung might — but man that’s a stretch thinking that giving away free music is going to sell phones. Apple already does it — so why does this move create share for Samsung?
Others have mentioned Liberty Media — but that’s a purely financial play. Sirius XM — sure they have cash flow — but the rights deal they have (roughly 8% of revenue) won’t travel to Pandora, and thus does not solve the problem that they have with their business.
No, I’m sticking with Ticketmaster/Live Nation and Stubhub as the absolute best buyers of Pandora — with a very outside chance that the artists get together and create a very cool collective from which to take back control of their own destiny.
But these are only my opinions, what do you think?
