Why (almost) everybody loves PandoraNovember 5, 2012: 12:38 PM ET
The Internet streaming company has avoided pitfalls while capitalizing on some of the Web's biggest trends.
By Don Reisinger, contributor
FORTUNE -- Facebook ruined everything. The social network's initial public offering was supposed to be the highlight of a new era for Web stocks. Instead, it was fraught with scandal and disappointment that are only just now beginning to dissipate.
Luckily, there is Pandora (P). The Internet music service exemplifies the mega trends that have defined the current generation of Web companies -- mobility, dependence on the cloud, and slick, user-friendly design. No less, its performance as a public company has largely made investors happy.
When Pandora went public last year, it wasn't clear how well the company could balance appealing to its users while still attracting investors. After all, as a music-streaming firm, it was paying significant royalties to labels that had, just years before, pushed it to the brink of closure. If not for a royalty deal and some advertisements between plays, Pandora might not still be around.
Without Pandora, though, it's hard to imagine what the current state of the online music-streaming space would look like. According to data released by the company, Pandora had 58.3 million users at the end of September, representing a 49% gain over the 39 million folks that used its service during the same period last year. Pandora controlled 6.5% of the U.S. radio listening audience, jumping from 4% last year.
Pandora has benefited from the mobile boom. According to its own figures, 70% of the firm's total listening hours -- about 771 million last month alone -- come via mobile products and so-called "non-traditional sources," such as connected televisions and set-top boxes. Over 100 million of Pandora's registered users have accessed the service from a smartphone or tablet.
Peter Sondergaard, head of global research at Gartner, reported recently that the research firm expects 1.6 billion smartphone mobile devices to be purchased worldwide in 2016. That same year, over 300 billion apps will be downloaded. Pandora is consistently one of the top 25 applications available in Apple's (AAPL) App Store. (During its iPad mini keynote, Apple showed off the app in a demo.)
It's not hard to see why so many analysts and investors are bullish on Pandora. In a note to investors earlier this year, Wedbush analyst Michael Pachter said that the company's services, coupled with tremendous customer loyalty, make it an obvious candidate for success. "In our view, Pandora's well-differentiated value proposition has resulted in strong customer loyalty, driving increasing popularity and a dominant Internet radio market share position," he wrote. Pachter pegs Pandora's 12-month price target at $14. The company's shares are currently trading at about $8, down some 17% for the year.
Of course, Pandora has plenty of competition. Spotify, which is wildly popular overseas, was viewed as a threat to Pandora when it launched in the U.S. last year. It's results have so far been mixed. Rumors that Apple might launch a competing service through iTunes periodically -- and so far temporarily -- seem to drive down Pandora's share price. There are also countless startups trying to reinvent online music, including Last.fm, Grooveshark, Deezer and Rdio.
Pandora's biggest challenge may be its very partners, however. Pandora founder and chief strategy officer Tim Westergren has complained about the disparity in royalties paid by Internet providers compared to traditional radio, calling them "astonishingly unequal." Earlier this year he wrote in a statement, "Pandora paid roughly 50% of its total revenue in royalties, more than six times the percentage paid by SiriusXM."
A resolution may come from Washington of all places where a bill, dubbed "The Internet Radio Fairness Act," is making its way through Congress. It aims at reducing the royalties online companies like Pandora must pay for music. A competing bill, called the "Interim First Act," would raise the rates paid by radio to match those paid by Internet firms. Regardless the outcome, Pandora is likely to stay in the center of the storm.