Pandora's IPO ... a sign of the times Steve Francia's Epic Blog

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Pandora filed their IPO today. By end of day Pandora was worth 3.2 Billion . The amazing thing about stock is it really has no direct correlation to a companies actual performance, but is rather valued based on perception, hype and desire. All very human emotions, not logic. Apparently all the people who purchased Pandora $P stock today hadn’t read Pandora’s filing with the SEC. I did. Here’s what you need to know.

So what is Pandora? Pandora is a new kind of internet radio station. It launched in 2000 (11 years ago) and is facing some really stiff competition. In spite of modest revenue it has burned through a ton of cash.

Under the risk section of the filing you can find this (Emphasis added).

We have incurred significant operating losses in the past and may not be able to generate sufficient revenue to be profitable.

Since our inception in 2000, we have incurred significant net operating losses and as of October 31, 2010, we had an accumulated deficit of $83.9 million.

Our total revenue has grown from $14.3 million in fiscal 2008 to $55.2 million in fiscal 2010 and $90.1 million in the nine months ended October 31, 2010. At the same time, our total cost and expenses have grown from $29.0 million in fiscal 2008 to $70.6 million in fiscal 2010 and $89.3 million in the nine months ended October 31, 2010, principally as a result of the growth in content acquisition expenses. As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue. In addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations. As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.

It’s not just the past 11 years that pandora has been burning cash, they fully intend to do so in the future and really have no end in sight. In fact they outright say that their profitability will be more difficult and may not be possible with scale.

A key element of our strategy is to aggressively increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses. If we cannot successfully earn revenue at a rate that exceeds the operational costs associated with increased listener hours, we may not be able to achieve or sustain profitability. In addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations. As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.

It’s not like they don’t have serious competition…

Although advertisers as a whole are spending an increasing amount of their overall advertising budget on online advertising, we face a number of challenges in growing our advertising revenue. We compete for advertising dollars with significantly larger and more established online marketing and media companies such as Facebook, Google, MSN and Yahoo!.

Our competitors include terrestrial radio providers such as CBS and Clear Channel, satellite radio providers such as Sirius XM, online radio providers such as iheartradio, Last.fm and Slacker Personal Radio, subscription online on-demand music providers such as RDIO and Rhapsody and potential U.S. market entrants like Spotify.

… We face increasing competition for listeners from a growing variety of businesses that deliver audio media content through mobile phones and other wireless devices, such as iTunes.

We believe that companies with a combination of financial resources, technical expertise and digital media experience also pose a significant threat of developing competing internet radio and digital audio entertainment technologies in the future. In particular, if known incumbents in the digital media space such as Amazon, Apple, Facebook or Google choose to offer competing services, they may devote greater resources than we have available, have a more accelerated time frame for deployment and leverage their existing user base and proprietary technologies to provide products and services that our listeners and advertisers may view as superior. Our current and future competitors may have more well-established brand recognition, more established relationships with consumer product manufacturers, greater financial, technical, and other resources, more sophisticated technologies or more experience in the markets in which we compete.

It is not without a touch of irony that their executive staff’s large compensation package is just about the same amount as Pandora would need to be profitable.

Is this a sign there is a bubble? You tell me. A unprofitable company with no clear path to profitability amid ridiculously strong competition from the likes of google, amazon, apple, facebook and cbs. A company that was put out of business almost completely 2 years ago due to legislation was just valued at 3.2 billion dollars. Tell me in the comments what you think, Sign of the times?