Why short sellers are missing Pandora’s enormous opportunity
While Pandora has certainly defended the initial onslaught from competition described in Part 4 of this series, the discussion of market share and competition glosses over the broader opportunities available to Pandora. In fact, Pandora has an enormous and unexploited opportunity in front of it that could generate significant revenue for years to come. Pandora is a member of the Global X Social Media Index ETF (SOCL), which seeks to provide exposure to an index of social media stocks.
Pandora is a disruptor of the traditional radio broadcast model. The company uses its database of songs to create a unique listening experience for users. To generate revenue, the company inserts routine audio and display advertisements, meaning the company’s addressable market is the radio advertising industry.
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During 2012, the U.S. radio advertising market (not including streaming services) generated approximately $15.7 billion in revenue. In contrast, Pandora generated $375 million in advertising revenue over the same timeframe. In other words, Pandora only captured a 2.4% share of the radio advertising market. Pandora users listen to approximately 1.3 billion hours of music per month according to company data, which represents 7% to 10% of total radio listening in the U.S.
Since the company captures 7% to 10% of the listening but only 2.4% of the revenue, this means Pandora earns less per minute of listening than traditional radio broadcast companies. To close this gap, Pandora could easily insert more ads without disturbing the user experience. If the company reached parity with traditional radio broadcasters, earning revenue in an equivalent amount of listening captured, it would generate approximately $1.1 billion to $1.6 billion in advertising revenue per year. This upside opportunity is the case the bears seemed to have missed. Plus, beyond this, Pandora could capture greater share of both listening and ad budgets, as the user experience appears to be superior and ads can more effectively target the user rather than the wider audience.