Is this the End of Pandora?

The end of Pandora Media (NYSE: P); or at least Pandora as we know it, is unfolding before our eyes. In desperate need of cash, Pandora went begging to John Malone’s Sirius XM Holdings (NASDAQ: SIRI) for a loan last week.

Sirius happily forked over $480 million for a 16% stake in Pandora, our friends at TechCrunch reported. The digital music provider also sold its’ Ticketfly subsidiary to Eventbrite for $200 million. Pandora paid $450 million for Ticketfly back in 2015.

It is easy to see why Pandora needs the money; instead of a net income it reported a loss of -$360.14 million on March 31, 2017. During the four years it has been listed on the New York Stock Exchange Pandora has never reported a positive net income. Instead it has reported a loss for every quarter since July of 2012; before its March 2013 IPO.

If that was not bad enough Pandora’s losses have been growing dramatically for almost every quarter since March 2015. Back then Pandora reported a loss of -$49.73 million; that grew to -$236.51 million in March 2016, and -$360.14 million in March 2017.

The Sorry State of Pandora

Pandora’s earnings report is a tale of woe that proves digital music might not be a viable standalone business. Some of the gory details of Pandora’s slow demise include:

  • A “profit margin” of -41.86%; if that is true Pandora lost 42¢ on every dollar invested in its business.

 

  • A diluted earnings per share number of -1.55.

 

  • A “free cash flow” of -$46.77 million.

 

  • Losing -$204.61 million in cash from operations during the first quarter of 2017.

  • Cash and short-term investments of $203 million.

 

  • Liabilities of $635.24 million.

 

There were also some numbers in ycharts’ version of Pandora’s financials that I found hard to believe, they included:

  • $104 million in cash from financing for first quarter 2017.

 

  • $1.098 billion in assets on March 31, 2017. (My guess is that the cash from financing came from borrowing against this number).

  • A market capitalization of $1.954 billion on June 12, 2017.

 

  • An enterprise value of $2.192 billion on June 12, 2017.

 

Why Does John Malone want Pandora?

If these numbers are real why is Pandora suddenly selling off assets and begging to John Malone for money? There’s something very wrong here, but obviously some value or Malone would not be sniffing around.

The most obvious answer is in the 81 million Pandora listeners that Statista reported in December 2016. Malone undoubtedly thinks he can leverage those listeners into a vast digital platform for audio content, similar to what he already has with Sirius XM. He may also want to get his hands on Pandora’s technology and engineering talent.

The most likely scenario is that Sirius XM would use Pandora to distribute its audio content such as Howard Stern online. A probable use would be to create exclusive subscription audio channels for singers, talk-radio hosts, comics and other big-time entertainers online. Pandora’s free content might be used as a marketing channel for that service. An interesting use would be to strike a deal to sell Pandora and Sirius XM content through Amazon Prime or Netflix.

One thing is certain, Malone is not interested in is Pandora as a stock. It was trading at $8.12 a share on June 12, 2017. Its owners were punished with a return on equity of -61.61% on March 31, 2017. Not surprisingly Pandora has never paid a dividend.

The whole situation is reminiscent of the way Malone took over Sirius XM a few years ago when it nearly collapsed. He slowly bought control of that company by purchasing its’ increasingly worthless stock. Since then Sirius has survived and made some money (a net income of $778.62 million for first quarter 2016) by selling subscriptions to car owners. Expect to see a similar arrangement for Pandora, with a strong focus on subscriptions and the float that they generate.

Will Taylor Swift Save Pandora or Kill it?

There was one good piece of news for Pandora last week. Super diva Taylor Swift’s song catalog will return to Pandora and its European archrival Spotify in the near future, The Associated Press reported. Swift had been selling her music exclusively through Apple (NASDAQ: AAPL) since 2014.

This is good news and bad news for Pandora; it will bring more customers to the digital platform, but cost it money. Pandora has to pay Swift royalties for the right to play her songs. Any profit it generates goes straight into the bank accounts of stars like Swift.

My guess is that Swift is trying to keep Apple from getting a near monopoly on digital music. That’s a very shrewd move on her part, but bad for Pandora which will have no choice but to pay whatever she asks for royalties.

Is Pandora’s Present, Netflix’s Future?

We might be seeing Netflix’s (NASDAQ: NFLX) future at Pandora. Like Pandora, Netflix has built up a vast digital distribution platform which it uses to distribute entertainment content it has to pay for.

Although unlike Pandora, Netflix is trying to produce at least some of its own content. There are some other similarities between the two companies. Both have to write big checks to major stars to attract an audience.

Netflix has one major advantage over Pandora, it generates some income $337.24 million and float through its subscription fees. It has also avoided entanglements with major stars and their agents seeking a piece of its cash flow.

A potential nightmare facing Netflix is that movie stars, producers, bigtime directors and major actors will start demanding a “cut of its gross” (entertainment slang for revenue) at some point. This is one of the biggest flaws in Pandora’s business model it has to pay revenues to stars like Swift and Beyonce to attract an audience.

Yet like Pandora, Netflix is burning cash it reported a “cash from operations” figure of -$1.59 billion on March 31, 2017. If that continues, Netflix’s stock price will collapse like Pandora’s and its management will have to go begging to investors like Malone for a loan. A likely outcome is that Netflix will end up selling itself to Walt Disney (NYSE: DIS). Disney; or a consortium, of entertainment giants would buy Netflix to keep Amazon (NASDAQ: AMZN) a stranglehold on digital video.

One thing is certain; Pandora users should enjoy the free music while they can. It is likely to end in the near future because this digital music platform is about to collapse.