Pandora IPO: No Thanks For Now.

I want to be clear and say that this post doesn’t represent a fully researched opinion, but rather some top-of-mind thought. But I can’t help but grappling with the question of whether Pandora is overvalued. Yesterday it closed with a market cap of about $2.8B and a stock price above 17; today it lost a half billion dollars from its cap and closed just above 13.

Still, that’s $2.3B for a company that hasn’t turned a profit in its 11 years of existence. In fact, reports have it losing more than $90M in that time.

The market cap fluctuations are fun to watch, and certainly investors and the music biz will be looking to see where the stock price settles in the coming weeks and months. But ultimately those fluctuations won’t much matter, or at least they will be determined by this: do investors believe that Pandora emerges as the dominant music listening experience? And if so, can that experience be properly monetized.

I don’t invest in music companies for obvious reasons of ethics. But if I did, I wouldn’t be buying Pandora at 17 or even at 13. No matter how great I think their product is - and I do think it’s great - I need to have confidence that they will have a business model in a few years, and I just don’t.

Pandora sales revenue rose to $51M in the three months ended April 30, from just under $22M a year earlier. Here’s a little context for those numbers: in 2008 - I believe the last year that Clear Channel reported such numbers - the radio broadcast division threw off almost $3.3B - that’s BILLION, with a “B.”

Meanwhile Pandora’s losses are growing along with their revenue, as they are paying almost 60 percent of revenues to music rights holders. Two years ago, webcasters and SoundExchange agreed on terms: the former would pay the greater of two rates: either a per-stream rate that increases annually until 2015, or 25 percent of U.S. revenues. As of now, Pandora is paying the per-stream rate for the right to play all those wonderful songs that the music genome project has identified. And here’s the kicker: the company is essentially living in a business model built around an adjustable rate mortgage. In 2015, the rates need to be renegotiated. There’s no real telling what happens then.

The only way Pandora investment makes sense to me is if you believe the company can become a scalable advertising company, a la Clear Channel. Right now there’s just way too many questions to believe that. And frankly, they’re way too far away from any indication that it might be true. Not only are they not there now, but the digital music advertising market is incredibly fragmented and will only get more so when Spotify finally launches in the coming weeks.

One other thought: Clear Channel still has enough clout and active listeners (you know, all those folks with one of those things called a “car”) to muscle in on the non-interactive streaming space if and when it really scales as a business. But what’s more, Clear Channel and the NAB are not without leverage. Music labels desperately want a performance royalty from radio. And for the record, they should have one - the other countries that decline to pay their artists for radio play are Iran, Iraq, North Korea and China, so, well… yeah. But if labels want payment for radio play, you can bet your ass that terrestrial radio is on the other side of the negotiating table demanding better rates for simulcasting, and generally less favorable conditions for Pandora.