There are two ways to think about Pandora.
The first is the way most people are familiar with (and the way founder Tim Westergren wants you to think about it): That it's an enormously popular music streaming service with millions of users and a huge mobile ad business. It's probably the third largest mobile ad seller behind Google and Facebook, and it takes in more than $100 million a year in mobile sales.
Impressive.
The other way is to regard it as a regulatory arbitrage gamble that's entirely dependent on lobbying Congress to reduce its song royalty fees in 2015. If those fees aren't reduced, the fundamentals of Pandora's business model must change radically if it is to survive. The fact that it took in more money from the maturity of short-term investments ($73 million) in the first nine months of 2012 than it did in subscriptions, and would be cashflow negative in Q3 if it had not done so, doesn't help the case for Pandora.
Not so impressive.
Pandora chief revenue officer John Trimble recently gave an interview in which he argued that profitability was "doable." He didn't give any details, however.
We decided to figure out how Pandora might actually achieve profitability, based on what we know already.
The following charts, drawn from Pandora's own financials, show how the company could -- in theory -- actually start making real money if it wanted to.
This is Pandora's problem. Costs and revenues rise in lockstep because it can only air an ad if it plays a song, and for every song it plays, it must pay a royalty fee. On this basis, Pandora is ultimately doomed. But ...
Pandora has recently been able to generate more revenue per user than it used to. It's either playing more ads, or selling those ads at higher prices. This is a healthy trend. And ...
Pandora's ad revenue is growing at a faster percentage rate than its operating expenses. This is also good news for the long term.
See the rest of the story at Business Insider
Please follow Advertising on Twitter and Facebook.
