Remember the rending of garments by Pandora’s overpaid executive team about how they just couldn’t turn a profit because of the royalties they paid under their statutory licenses? Statutory licenses allow Pandora to operate without paying minimum guarantees like they will need to do for their much ballyhooed on demand service that is yet to launch. And remember the standing offer we made to pick any MBA lurking in any business school corridor anywhere in the world to help a company with government mandated price controls on the expense side and over $1 billion in annual revenue turn a profit?
Looks like their secret is out–as Bloomberg’s Shira Ovide writes, Pandora is feeling the burn. This right before (we suppose) that Pandora launches its on demand music service for which they are serving millions of “address unknown” NOIs on the Copyright Office to stiff songwriters on statutory royalties. The story from Ms. Ovide is thought provoking, but let’s provoke this thought: What happens if Pandora can’t pay its statutory royalties at all?
At its current rate of cash burn, then, [Pandora] will exhaust its reserves of ready cash in about 10 months.
What happens to the statutory royalties if Pandora goes bankrupt? Remember–in bankruptcy, artists and songwriters are known as “unsecured creditors” standing way, way behind Pandora’s creditors such as bond holder Texas Pacific Group. Of course, it’s probably more likely that Pandora’s exit will be a sale–hopefully before it misses a royalty payment and hopefully for more than the $450 million of cold cash it spent on the misguided acqusition of Ticketfly.
Pandora said on Thursday that it was being savvy about how it lures new subscribers without overspending on marketing and that it was finding more ways to automate advertising sales. The company also said its “commitment to cost discipline” — i.e., its willingness to fire people and pinch pennies in nonessential areas — would allow it to devote funds to new products. Using a customized measure of earnings, Pandora said it expects to do better than the losses forecast by Wall Street analysts. The company still doesn’t expect to be profitable under conventional accounting standards.
The best hope to cure Pandora’s ills is a sale. And that’s why Pandora’s stock moves up mostly at any hints a sale might be coming.