ikkyu2 (99.52)

I Opened The Box

July 03, 2011 – Comments (2) | RELATED TICKERS: P

I own some Pandora.  Been a happy client of theirs for a long time.  People who listen to music want what Pandora has to offer, and some folks who listen to music even pay for it.

I wouldn't be surprised if Pandora lost me every dime I've put into it.  It well may do so.  That's what makes owning Pandora a 'speculative' sort of investment - not what you put your whole retirement plan into, got me? But the kinds of arguments being made against Pandora - most recently in TMFUltraLong's article:

 http://www.fool.com/investing/general/2011/06/29/these-2-companies-will-never-turn-a-profit.aspx 

remind me of the kind of arguments I heard in 2003 about the iTunes music store, now renamed the iTunes store. At the time, Napster had just been shut down and it was clear people wanted music delivery over the Internet, but the conventional wisdom was that there was no way to get money from this. 

You don't hear much about Apple's foray into the online music market, even though it clears $1 billion + per year in FCF for the company, because that's just a drop in Apple's bucket compared to their other earnings.  But Apple is a huge player in music sales these days.  Some authors think Apple single-handedly saved the music industry and, with their innovative contracts with the labels (now replicated by a lot of firms), basically went from Rule Breaker to Rule Maker in about a year.

Right now Pandora's a rule breaker - it knows what you like and makes a custom radio station just for you, playing tunes that might be your old faves and introducing you to artists that you might not have heard of.  There will need to be some innovation on the back end to match; the labels will have to give a little to get their music out to Pandora's subscriber base using Pandora's model.  But for the labels, what Pandora essentially is is what radio stations used to be, and what the iTMS and Apple's "Genius" technology is: advertising. 

Heck, I remember the 90's, when if you wanted to invest in advertising you had to know someone who'd sell you an interest in a closely held ad firm.  The new generation of advertisers are publically traded - anyone remember a little Palo Alto upstart called Google?  They did OK because they used technology to target ads to people who wanted to see them.  Pandora does essentially the same thing.  I think they have a chance at capturing some of the music consumer's discretionary dollar, and that's why I own a little bit of their stock.