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Pandora Rakes In $1.16 Billion Ahead Of Its Biggest Changes Ever

Pandora made $1.16 billion last year. So why is this company charting a different course for 2016 and beyond?

Pandora Rakes In $1.16 Billion Ahead Of Its Biggest Changes Ever

[Photo: courtesy of Pandora]

Internet radio is officially a billion-dollar business. In 2015, Pandora made $1.16 billion from its 10-year-old personalized Internet radio platform, the company reported Thursday as part of its fourth-quarter earnings release. That's a 26% increase in revenue over last year. So why is the company looking to chart a very different course over the next few years?

The answer lies, in part, in some of the other numbers Pandora revealed in its earnings report: While revenue is growing, its content content costs are still very high at $610 million for the year. Meanwhile, its audience shrunk slightly from last year, landing at 81.1 million listeners. All told, Pandora lost $170 million.

The news comes just hours after a New York Times report that Pandora has hired Morgan Stanley to help it find a potential buyer. The company has, quite naturally, declined to comment.

Meanwhile, the competition won't stop heating up. If Spotify's growing popularity weren't enough of a force to reckon with, Apple launched Apple Music last summer, reportedly nabbing 10 million subscribers in a matter of months. Having failed to reduce its hefty royalty costs in recent years, Pandora continues to operate a challenging business.

But Pandora has a plan. Recognizing the threat posed by on-demand subscription services like Spotify and Apple Music, the company acquired the assets of subscription service Rdio late last year. Pandora is now busy integrating 96 members of the Rdio team into its operation and mocking up the next iteration of Pandora: an Internet radio service with an "all-you-can-stream" on-demand music subscription option.

While on-demand streaming is a tricky business model in its own right, Pandora recognizes the larger trend in the music industry. Paid subscriptions are generating more money than the ad-supported model that fuels the bulk of Pandora's current business. So while $1.16 billion is no small sum, the company realizes there's much more to be made, especially if it can extend its business beyond Internet radio.

Pandora is also getting more serious about its role in the live music industry. Having already successfully helped bands plan tours, book shows, and sell tickets, the company is planning to ramp up these kinds of efforts. In addition to getting more involved in booking shows (and possibly using some of its blue chip advertiser relationships to help make money from concerts), Pandora plans to become a competitor to Ticketmaster. Its acquisition of ticket-selling service TicketFly last year will help Pandora generate a new stream of revenue that isn't burdened by licensing costs.

The company is planning to build a ticket-buying functionality directly into its music streaming app, and to leverage its big-data machine to directly target fans with the option to buy concert tickets based on their tastes. Pandora's ambitions in the live concert market are high: The company said in today's call that it expects to add $80 million to $90 million in revenue thanks to its TicketFly acquisition. TicketFly generated $10 million in revenue during the last quarter of 2015.

The music streaming business is a notoriously tough one, and it only gets more challenging when huge tech companies like Google, Apple, and reportedly Amazon start jumping into the space, operating music services with less pressure to turn a profit than music-focused companies like Pandora and Spotify face. But if Pandora has one advantage—other than its decade-strong legacy and brand recognition—it's data. The company has already amassed an enormous trove of information about listeners' tastes and preferences, which it uses to power its own product development and ad business. When it launches its on-demand subscription library, that data will get even more extensive. And with its 2015 acquisition of social music analytics startup Next Big Sound, Pandora just scooped another source of hugely potent music data.

Does this mean that Pandora is going to turn a huge profit in 2016? Almost certainly not. But the company recognizes the need to chart these new paths so it can start diversifying its business and grow revenue more quickly than its costs pile up. That will likely take awhile, but in the meantime we should expect to see Pandora start taking on a very different shape as a product in the coming months.

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