Pandora made $1b last year but is it looking for a buyer?

Pandora last week posted record revenues that were above expectations, and the number of users rose to 81.5 million, making it the largest music streaming service. But reports from the US are that it might be looking for a buyer.

Over the 12 months of 2015, Pandora’s revenue was up 26% to US$1.16 billion (A$1.63 billion), slightly above its expectation of $1.153 billion ($1.56 billion) to $1.158 billion ($1.6 billion). In the fourth quarter, the revenue of $336.2 million ($472.9 million) was up 25% and was over the $325 million – $330 million ($457 million – $464 million) it forecast.

However the bad news was that Pandora Media actually made a net loss of $169.7 million ($238.7 million). This was due to a $143 million ($201.1 million) spend on content acquisition costs” and $112 million ($157.5 million) on sales and marketing in one quarter alone.

The core of Pandora’s problem is its inability to make money from their users. Only 3.9 million pay the $5 ($7) subscription. The rest comes from ads. Pandora is talking about expanding to new countries, beyond the current three of Australia, New Zealand and America. But there is a scepticism its current business model cannot make money

Prof Erik Gordon of the Ross School of Business at the University of Michigan sums it up: “It has lots of users but can’t grow revenue quickly enough. It is another stumbling pioneer. ”

The New York Times reported late last week that Pandora Media is working with Morgan Stanley to reach out to buyers as Spotify and Apple move into its turf.

An anonymous source told the Times that talks were still preliminary and might not end up in a deal. Pandora shares jumped up 10% after the report appeared, giving the company a value of $US1.9 billion ($2.6 billion). But the shine didn’t last; stock declined 5.8% in after-hours trading. Before the spike, Pandora shares lost 67% value in the past year.

Two years ago, a report of Pandora’s sale cited Sirius XM Holdings, Amazon and Google as potential buyers.

On the positive side for Pandora, music streaming in America logged nearly 145 billion audio streams through 2015, up 79% from the year before, according to Nielsen.

It is also expanding an on-demand service to take on Spotify and Apple, and is using the assets it bought from the Rdio streaming service. Its latest listening hour figures suggest some users are returning after trying out Apple Music.

But the negatives are that it is also competing with Spotify and Apple Music in the same area to target new advertisers – from terrestrial radio. Record companies and publishers are pushing for better royalty rates: it wants to bring it down to 14 cents (19 cents) per 100 streams from the current 17 cents (24 cents), they want 25 ($35) to 29 cents ($41). Analysts are predicting a 20% decline in gross earnings, and note that Pandora has not been in the black since its 2011 IPO.

Listening hours are also up slightly: up 5% to 21.1 billion for the full year, and 3% more to 5.37 billion for the fourth quarter. But active user numbers are dropping: in the fourth quarter, they went down from 81.5 million to 81.1 million.

That still leaves Pandora in front. But Spotify is rapidly closing in: last June it was claiming 75 million users, up from 50 million in November 2014. Apple Music reached 10 million six months after launch.

Pandora and Morgan Stanley have declined to comments on the sale reports. Pandora told TMN it is not its policy to comment on rumors or speculation.