Pandora Media (NYSE:P)

CAPS Rating: 1 out of 5


Player Avatar MrOneHundred (30.80) Submitted: 11/17/2012 5:44:39 AM : Underperform Start Price: $9.81 P Score: +11.28

Pandora has an impossible time making sustainable profit. The company currently pays 50% of its revenues to musicians in the form of royalties enforced by government legislation. Even if CEO Joe Kennedy manages to acquire the "Internet Radio Fairness Act," Pandora will be having a very hard time competing with iTunes (AAPL), Spotify, Xbox Music (MSFT), and Sirius XM (SIRI) who seem to be mimicking Pandora's personal approach style.

Pandora may have increased in users over the last year, yes (going from making a mere 5% internet radio presence to a 7% one), but by increasing in users, the company is forced to pay more to musicians. According to an article, "Pandora’s success has been double-edged – the more customers it gains, the more money it has to pay overall for rights to stream music." With present legislation in place, Pandora's price will continue to spiral downward.

The battleground for internet radio is also quite rugged. While the "Internet Radio Fairness Act" is on the table, several influential musicians (according to an article) including Billy Joel, Rihanna, and some 125 other musicians are calling it unfair to take away what the musicians are relying on as a source of income. Whether that assertion is a fair one or not is beside the point; having those sorts of popular opponents will make it very difficult for Pandora to secure the legislation. Also, consider Pandora's opponents who are beginning to mimic its style, and the company's chances of turning around seem to be very slim indeed!

On the flip side, Pandora had a major $10 million investment made by Coca-Cola (KO). Did I miss something here? When did Pandora become a good investment? Perhaps a future buyout is underway? If so... who would want to own Pandora?

The only company that could properly use Pandora, in my opinion, would be Apple or Microsoft who are at war over the mobile device environment. Buying the internet music the "hipsters" follow would give one of these companies an advantage over the other in the long run. However, they both own their own form of internet music, so who else is trying to compete here?

Maybe this potential buyout is just to take Pandora off the battleground.

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