Is Pandora boxed in by supplier pricing power?

The 1990s brought numerous dot-com companies that never turned a profit, but had a “business model” of selling themselves to the greater fool, whether it be public shareholders or acquisition by a large firm. (This trend confused my students, who after several years of bad examples thought flipping a money-losing company counted as creating a business model).

Most of those companies are long gone. Instead, we have Pandora, which has yet to show a profit since its June 2011 IPO, but has a market cap of $1.7 billion.

To be fair, it has survived predictions of failure from four years ago. In a difficult market segment where firms have little control over costs (i.e. royalties), Pandora remains the most successful Internet radio service of all time, with Last.FM swallowed up (and largely forgotten) within the bowels of CBS, Live365 remaining privately held and most of the other firms now defunct.

The recent interest (and speculation) in Pandora centers on Apple’s rumored plans to create its own music streaming service. (More recent accounts say Apple’s plans have been delayed by the greed of the same record companies that make it impossible for Pandora to turn a profit.) The speculation knocked Pandora’s stock off its highest price since March, but other than that temporary blip, the stock has been trading in a range of $10-11 per share for nearly five months — although below its $16 offering, that would be a raging success by Facebook standards.

Now some (including Business Week) speculate that Apple’s interest will prompt Apple’s major rivals to buy Pandora to compete. Google competes with Apple on cellphone platforms, while Amazon is its major competitor in music streaming.

This comes despite analyst predictions of 2012 Pandora losses nearly doubling to $30 million. As with three years ago, Pandora is losing money on every sale but making it up on volume. (Thanks to the IPO, the company’s balance sheet is solid enough weather several years of such losses, even without any secondary offering).

Business Week even speculates that Clear Channel might be interested in supplementing its online service with Pandora (much as CBS bought Last.FM). This seems the least plausible, given all Clear Channel has spent on iHeartRadio, the mobile clients and even live concerts to promote the brand.
So as in the dot-com era, we have the hope that losses will be redeemed by a beneficent acquisition before the company runs out of money. But where is the business model? If it’s not possible to make money with current pricing (and cost structure), will volume solve the problem?

From following the cost structure of Internet radio for more than a decade, I see no cause for optimism. Facing a collapse in their core business, Hollywood labels hope extract every penny from newer (and smaller) channels, including Internet streaming. The bigger and more successful Pandroa gets, the more money record companies will seek to extract. Like a Dumas musical, it’s unlikely to turn out well for the protagonist.