p followup

1. Relevant acquisitions / multiples suggest Pandora is undervalued: • Jan 2015: Jay Z (S Carter Enterprises) buys Aspiro AB (music streaming service) for $56mm; Aspiro has ~500k users • Jan 2015: Spotify rumored valuation of $6bn+ (as of Jan 2015); Spotify has ~15mm ‘paying subscribers’ and 60mm overall users. • Jan 2015: French based music streaming service Deezer (competes with Spotify) buys Muve music (owned by AT&T subsidiary, Cricket); price undisclosed; Muve was estimated to have 2mm users in the US • Dec 2014: Messaging app Line acquires MixRadio from Microsoft (terms not disclosed) • July 2014: Apple acquired Beats for ~$3.0bn (seven month old subscription service at the time) • July 2014: Google acquired Songza for $39mm+ in July 2014 (6mm regular users at the time) • Potential suitors for Pandora: Facebook has not made its move within music streaming marketplace as yet. Amazon Prime’s music streaming service has been criticized as ‘unimpressive’ by several market participants. Meanwhile, Microsoft recent sold MixRadio (see above) and could also show interest. Why are Pandora’s subscription revenues such a small portion of revenues and why aren’t they growing faster? • Recall, of Pandora’s 82mm users, only 4mm (4%) are paid subscribers. These subscribers pay $4.99/month (or $55/year). • Management has alluded to the predisposition of consumer & unwillingness to pay for music as a key justification for its decision to stay close to ad market, with less emphasis on growing subscribers. • According to Pandora, NPD (market research firm) survey shows ~50% of US population spends less than $0.01 on music access in a given year. Of the remaining 50%, 36% pay $15-20 annually, leaving only 14% willing to pay more than $20 annually. Rough math would imply less than 40mm individuals are willing to pay $20+ annually. • In general, I believe users are more likely to pay for “on-demand” audio (Spotify) and are less likely to pay for “add-free” radio services (offered by P). • Implication: Could adjust revenue growth from subscriptions slightly higher (vs. 8-9% growth rates assumed in model). Why has Pandora not pursued on-demand service? • On-demand models require direct licenses and profitability challenging (anecdotally, Spotify is rumored to pay out as much as 80% of revenues in royalties, owing to the “on-demand” model). What does Sirius charge and how does it compare to Pandora’s rates? • Sirius XM charges between $10-20/month on its services; 10-K highlights ARPU (average revenue per user) of $12.50 annually (owing to promotional discounts) • Sirius has 27mm paying subscribers (up every year from 2009 at least, when figure was 19mm). Meanwhile, Spotify has 6mm paying subscribers (likely up y-o-y) • Per SIRI 10-K, in 2014 ‘CRB determined’ royalties were 9.5% of revenues (10.0% for ‘15, 10.5% for ‘16, and 11% for ’17) How many minutes of ads per hour for conventional radio vs. Pandora? • Traditional radio has 20 ad spots with each 30 seconds in duration (10mins of ads/hour) vs. Pandora has a max of six 30-second ads (3 mins/hour) • Implication: potential to squeeze more ads/hour, but P brands itself as a ‘lower interruption’ music service Pandora Board / Insider transactions: • Recent activity: CEO Brian McAndrews disclosed that he bought 25,000 shares of Pandora stock for a mean price of $18.58 on Nov 12, 2014 (stock rallied 16% that day) • Current Board members / tenure: o Brian P McAndrews (1.4yrs tenure) o Robert M Kavner "Bob" (5.0yrs tenure) o Peter C Gotcher (9.4yrs tenure) o James McDowell Preston Feuille "Jim" (9.4yrs tenure) o David Sze (6.0yrs) o Peter F Chernin (4.2yrs) o Elizabeth A Nelson "Betsey" (1.6yrs) o Tim Westergren (co-founder)