How Apple Put Pandora in a Box
ENLARGE Pandora Media said total listener hours grew only 3% year over year in the third quarter. The Internet radio company's logo is displayed on an Apple iPhone in Washington, D.C., on Sept. 17, 2013. Photo: Andrew Harrer/Bloomberg News
Never pick a fight with a company that has $203 billion in cash. The bruising Pandora Media received Friday is a cautionary tale of the difficulties of competing with Apple.
The Internet radio company said late Thursday that total listener hours grew only 3% year over year in the third quarter. That fell far short of most analyst expectations that growth would continue at around the 5.2% level Pandora saw in the second quarter.
The reason: The June 30 launch of Apple Music and its accompanying three-month-free trial caused other competitors such as Spotify to ramp up their spending on marketing, leading to what Pandora called a "short-term impact" on its audience growth. The company's shares plummeted, falling 35%.
Pandora said it also expected 3% growth in total listener hours in the fourth quarter and lowered its full-year revenue guidance to $1.153 billion to $1.158 billion from a previous range of $1.175 billion to $1.185 billion. That implies a substantial deceleration in growth of revenue per thousand hours, a key monetization metric. Difficult comparisons with last year's rapid growth are part of the reason, but the slower-than-expected growth in listener hours also means lower inventory to drive ad revenue.
And these top-line worries don't even take into account a big question looming over Pandora's expenses, namely the pending decision by a government board on the statutory rates it pays artists. Content costs accounted for 61% of revenue in 2014. Pandora, which has petitioned for a sizable decrease in rates but faces opposition from record labels, said it expects a final ruling in December.
Now, even if the government decides in its favor, Pandora's new revenue growth questions will continue to weigh.
Granted, the competitive pressure could wane as more listeners roll off of Apple Music's free trial. But if a significant portion keep paying for the service, Pandora may need to fight back with a major marketing campaign next year. That's not a song investors will like to hear.
Write to Miriam Gottfried at miriam.gottfried@wsj.com
Posted by: Kris Murray <krismurray@gmail.com>
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