Digital entertainment is fast becoming a black hole into which money is dumped never to be seen again. The most blatant case of this is Pandora Media (NYSE: P) a company that seems to do nothing but lose money.
The financial numbers that Pandora reported on March 31, 2016, are absolutely incredible – incredibly bad that is. There was the profit margin of -38.72% that ycharts reported for example. If correct that figure means Pandora loses money from all of its operations.
That profit margin gave Pandora a negative net income of -$236.51 million, an earnings per share figure of -1.078, a free cash flow of -$34.65 million and a return on equity of -38.46%. Pandora also lost $82.17 million in cash from operations.
Why is Pandora Losing so Much Money?
The reason Pandora is losing so much money is simple; it produces no content of its own so it has to pay for everything it broadcasts. There are no other streams of revenue available such as Netflix (NASDAQ: NFLX) and Sirius XM’s (NASDAQ: SIRI) subscriptions, or World Wrestling Entertainment’s (NYSE: WWE) merchandise, subscriptions and ticket sales.
An even greater problem is Pandora’s lack of original content. Netflix, Sirius and WWE all offer at least some original content they control. Sirius has Howard Stern, Netflix has several series and WWE has nothing but original content. Those networks also have other sources of revenue they can tap.
The only way Pandora might money would be to create original content and charge for it. Instead Pandora pays for content; music, and gives it away online. It basically provides free advertising for artists; and pays them for the privilege.
How Pandora Might Make Money
Pandora’s current business model is deeply flawed and it might not be fixable. The only way I can imagine Pandora might make money; would be to add some sort of exclusive channel that users would pay extra for.
Even that can be tough because the service would have to charge a fairly low subscription fee to attract fans. WWE charges $9.99 a month for its WWE Network, a basic Netflix subscription costs $7.99 a month, and a Sirius XM subscription runs between $10.99 and $19.99 a month.
Such a network would require some sort of original offering that cannot be found anywhere else. Sirius succeeds because it is the only place you can listen to Howard Stern for example. My guess is that most musicians would balk at creating original music just for Pandora unless they were paid a lot of money.
Another possibility might be a popular talk radio personality such as Rush Limbaugh; or Glenn Beck. Such a celebrity would be expensive and he would have to give up the vast radio audience and the political influence it brings.
Will Pandora Ever Make Money?
Pandora is quite simply one of the worst stocks around right now. Its return on equity was -38.46%, meaning shareholders lost more than one third of their investment.
Nor is likely to get better any time soon. My prediction is that Pandora will keep losing money until somebody pulls the plug on it. Despite its popularity, Pandora is a doomed company because there is no way it can make money.