Tuesday, June 14, 2011

Pandora Makes no Profit but has Filed IPO

Pandora is a very popular online radio station and has been around for a while. The company does very well in terms of subscribers and has expanded their product across many mobile platforms. The problem is the company has made no profit.  According to “Pandora: The money-losing music machine” by Dan Mitchell of CNN Money/ Fortune.com, the company had lost of $6.8 million in the most recent quarter and $3 million the quarter before that. Despite the continual losses, Pandora has filed an IPO and might debut in the market tomorrow.

The reason Pandora cannot make profit is they lose money every time the product is used.  The article explains the problem as:

“The trouble is the music royalties Pandora has to pay to music labels every time it streams a song. Those rates are higher than the advertising revenue Pandora collects. Every transaction is a money-loser. In its IPO filing, the company says it will continue to lose money through ‘at least’ fiscal 2012. But there’s nothing to indicate what might change in that time to turn around its current losses.”

This is a sad puzzle. Pandora will want to maintain its product and users but they lose money for every song played. Clearly, the company is prepared for more losses but I fear they may have run out of time. First, by rushing onto the market, they crushed the time they had to develop a plan. Pandora needs money but they have to prove that investors should invest in a profitless company. Instead of working on a steady plan to make profit, they skipped that to debut on the market.  I don’t know if Pandora thinks this is the greatest time for all tech companies to file IPOs but all they are doing is contributing to a tech bubble and wasting time. Second, Apple has debuted the iCloud and Amazon has a cloud player. Granted these products are not completely Pandora-esque internet radios but they can compete with Pandora. Pandora’s competitors are increasing.

Although they have a wonderful product, Pandora is not making money. Users will keep Pandora alive as long as the company has money to stay operational. The best thing to do is to work on a solution to their profit problem. When they figure out the answer, they will become an attractive company for investors.

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