Friday, June 17, 2011

Pandora: Busted IPO... or Long Term Opportunity?

Pandora didn't quite have the legs that LinkedIn did after their IPO, did it? Within a day of its IPO Pandora is now trading under its public offering price. Most analysts have been skeptical of Pandora (and of most tech IPOs) because they're not yet profitable, they don't have a solid moat, the barrier to entry in their industry is small, and they're a tech company struggling to make it in this Web 2.0 environment.

A lot of people see this company tanking in the future, and I can respect most of the reasoning presented, but part of me sees Pandora leading a shift in the music consumption patterns of people. We all know that the CD business is on its way out. Record labels have been slow to adapt to a digital world and have lost a lot of power and the ability to control what people are exposed to. Yes, we still have the mega-stars like Lady Gaga and U2, but there's now a seeming infinite amount of options for music to fit your very specific personal tastes.

No longer are you relegated to picking a radio station that plays music that sort of fits into the realm of music you listen to. No longer are you forced to pay for the ability to have a more tightly curated set of stations to listen to (a la satellite radio).  Instead you simply have to head to Pandora or to get personalized radio stations based upon an artist you're interested in or a specific genre of music. And if your mood changes, you just flip to a new genre station.

I think that this ability to quickly get to a type of music will be appealing to casual listeners, especially if Pandora can get more penetration into mobile devices, cars, and stereo components.  If they can emulate the Netflix approach and get their service on every device imaginable, they can turn themselves into THE source for customizable internet radio.

Yes, there are competitors from some big players like Apple with their iCloud and Amazon with their digital locker for music, but I don't see either of them as true competitors. Those services are for people that still buy specific music, listen to specific artists, and want a pre-defined music selection to choose from at any time. iCloud and Amazon's services will fill that niche. Pandora, however, will appeal to more casual music listeners that still crave some amount of choice.

To make a further comparison between Pandora and Netflix, look at Netflix's "competitors" -- Amazon and iTunes. Again, I don't see them as real competitors. Amazon and iTunes are great for purchasing or renting specific titles while Netflix simply provides you access to a load of content for various tastes and you can take what is given you to fill that craving at a specific time. Pandora presents you with something to fill your craving for a certain genre, but might not give you specifically what you want. To get specific items, you use iTunes or Amazon. If anything, they are complementing services.

I think Pandora is a risky short term play for sure, but as a long term play, I think they have quite an advantage that they can use to truly capitalize on the shifting consumption patterns of music listeners. I might be throwing money into the flames, but even after their busted IPO, I've put a small position in Pandora in the hopes that, as a longer term play, the company can become the Netflix of music.

No comments: