Pandora's IPO: Beyond The Music

Leading Net radio service Pandora has just priced its IPO, ready to lead a nascent industry into the next phase. Here's how deal breaks down—and some interesting questions on the company's ability to compete with Apple, Google, Amazon, and Spotify.

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Back in February Pandora filed the relevant documents to signal its intent for an Initial Public Offering, which was tentatively priced at around $100 million. It's taken four months of the usual haggling and planning by the company and its financial advisers to settle on a price, which it's just announced today: $16 per share to the public.

As part of its press release, Pandora notes this will be the price for around 14.7 million ordinary shares—meaning the company's notional income from the IPO will be in the region of $235 million, a bigger figure than the initial estimate. Around 6 million shares will be offered by Pandora itself, and 8.7 million will be offered by "selling stockholders," the firms who've already invested cash into the company. That means Pandora and its execs will make approximately $96 million, which actually does line up with its IPO filing. The tentative valuation this gives the company is around $3 billion—an enormous sum.

How does this tally with its most recent performance though? At first glance it looks good: At the end of May Pandora reported its revenues for the quarter were up 136% to $51 million from just $21.6 million for the same period in 2010. That's a success story—a sign that the company is growing its registered userbase (up 77% over the 2010 figure) and their cash engagement with Pandora's services. But the firm actually reported a net loss for the Q1 period of this year, and at $6.8 million this is a big leap from a $3 million loss in Q1 of 2010. The loss is mainly excusable as Pandora's been investing in its infrastructure in the run-up to IPO, and in this same internal-spending manner, the firm actually expects to run at a loss throughout 2012—and possibly beyond.

And here's where a few worries may creep in. Pandora is indeed now something of a success, having previously reported profits after a grim period, and its people-driven algorithm does appeal to users. But rival service Spotify, which is highly successful in Europe, is now reported as close to signing the final deals with the U.S. music labels that would let it bring its own Net streaming music model to the American market. Depending on how this market develops, Spotify may rival Pandora for consumers in the space, and possibly eat up some of Pandora's share.

Meanwhile Google and Amazon have just launched cloud music services which, while not exactly replicating Pandora's services at least offer something comparable—the cloud music locker, which may satisfy many consumers looking for a way to access music online (this time from their own collection). Apple, which controls massive market influence as the biggest retailer of music, has just revealed its plans to put iTunes in its iCloud, via a half-music locker, half-cloud-server model.

And Pandora, its rivals, and Google and Amazon all rely on data streaming to the device the user's using to access their systems—whether over terrestrial broadband or 3G wireless links. In an era where unlimited data access seems to be disappearing and data caps with fees for overage are becoming the norm, Apple's model for cloud music access may prove the most resilient.

Pandora mentions some of this in its S1 filing:

Internet radio is an emerging market, and if we are unable to increase the number of listeners and listener hours or to convince advertisers of the benefits of our advertising products, our business and future prospects will be harmed.

The S1 also notes Pandora really must aggressively attract users in order to capture the market and bring in advertising revenue (86% of its income in early 2011 was from advertising). With peers and similar rivals, including the giant that is Apple, stomping into the market, Pandora's IPO is going to be an interesting affair to watch.

[Image: Flickr user heza]

Chat about this news with Kit Eaton on Twitter and Fast Company too.

Read More: Most Innovative Companies: Pandora

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2 Comments

  • Bud Thompson

    Kit Eaton does for Apple what Fox News does for Republicans. This starts out as a substantive  discussion about Pandora's IPO but ends as a smarmy pro-Apple piece.