Online Music Business Models: Broken?

The U.S. radio market is expected to be worth $37 billion. Apart from traditional media companies, the market is being tapped by online radio players. Pandora, a recently listed player, claims that it has access to 5.5% of the U.S. radio market – significant growth over previous year’s share of 2.7%. But the increasing market share has not translated to improved margins. Like last week’s Tech Stock’s company Yelp, Pandora has yet to turn in a profit, and now analysts are doubting if the company would ever be able to report one.

Pandora’s Financials
Pandora’s (NYSE:P) Q4 revenues grew 70% over the year to $81.3 million. However, the company continued to report a loss for the quarter and ended it with a loss of $0.03 per share. The Street was looking for revenues of $83 million and a loss of $0.02 per share.

By segment, advertising revenues grew 74% over the year to $72.1 million and subscription revenues grew 50% over the year to $9.2 million. Listener hours during the quarter grew 99% over the year to 2.7 billion and active users in the period grew 62% to 47 million.

Despite revenue growth, margins are not improving as marketing and content acquisition costs continue to grow. During the quarter, content acquisition expenses grew from $23.9 million a year ago to $48.2 million.

Pandora ended the year with revenues growing 99% over the year to $274.3 million, with advertising revenues growing 101% over the year to $240 million and subscription revenues growing 87% over the year to $34.3 million. For the year, they reported a loss of $0.02 per share.

For the current quarter, Pandora expects revenues to be $72 million-$75 million with a loss of $0.18-$0.21 per share. The market was looking for revenues of $86.5 million with a loss of $0.02 per share. Pandora expects to end the current fiscal with revenues of $410 million-$420 million and a loss of $0.11-$0.16 per share. The Street was projecting the company to report earnings of $0.04 on revenues of $424 million for the year.

Pandora’s Mobile Monetization
Pandora believes that the current year will be dominated by the push to monetize mobile device traffic. Mobile advertising is expected to be worth $ billion1-$2 billion for 2011 and is projected to grow to $13 billion-$20 billion by 2015. Last year, Pandora’s ad revenues on mobile devices quadrupled to $100 million for the year. During the year, mobile listening was more than 70% of their total listened hours. However, mobile device revenue per thousand  impressions, RPM, of $20 was significantly lower than their desktop user RPM of $60-$70.

Pandora’s Strategic Tie-ups
Pandora continued to enter into several tie-ups to expand their market reach. They recently partnered with DirecTV to let DirecTV’s consumers access Pandora’s station using their on-screen HD Guide. Within the automotive segment, they tied up with Kia and Audiovox. Audiovox is a marketer of automotive entertainment, vehicle security systems, and consumer electronics products. As part of the agreement, Audiovox will include Pandora on their Advent and Jensen branded mobile multimedia systems starting this spring.

Pandora’s stock is trading at $11.50 with a market capitalization of $1.87 billion. It touched a high of $26 soon after its listing in June 2011. I am not convinced about the business model of the online music business. It seems to be largely a not-for-profit situation, with free riders who are not willing to pay for anything.