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Pandora goes public – what are the risks?

PandoraEvery radio blogger from here to Mars knows by now that Pandora online radio announced today that it is going public. The Form S-1 has been filed with the Security and Exchange Commission outlining the $100 million Initial Public Offering. Obviously Pandora has a lot to offer investors. It had 80 million registered users as of January 2011. The company estimates that it adds a new registered user every second (on average).

Plus, Pandora has cornered around half of all Internet radio listening among the top 20 online stations and networks in the United States, according to one survey. “Since we launched the Pandora service in 2005, our listeners have created over 1.4 billion stations,” the document adds.

But despite revenue of $55.2 and $90.1 million in fiscal 2010 and the nine months ended October 31, the company experienced a respective net loss of $16.8 million and $0.3 million.

And the SEC filing comes with plenty of warnings:

We have incurred significant operating losses in the past and may not be able to generate sufficient revenue to be profitable.

Since our inception in 2000, we have incurred significant net operating losses and as of October 31, 2010, we had an accumulated deficit of $83.9 million. A key element of our strategy is to aggressively increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses. If we cannot successfully earn revenue at a rate that exceeds the operational costs associated with increased listener hours, we may not be able to achieve or sustain profitability. In addition, we expect to invest heavily in our operations to support anticipated future growth and public company reporting and compliance obligations. As a result of these factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.

More on the royalties logjam: “For the nine months ended October 31, 2010, we incurred SoundExchange related content acquisition costs representing 45% of our total revenue for that period,” Pandora discloses (!!!). SoundExchange collects copyright fees from streamers.

And there are also advertising uncertainties:

We rely upon an agreement with DoubleClick, which is owned by Google, for delivering and monitoring our ads. Failure to renew the agreement on favorable terms, or termination of the agreement, could adversely affect our business.

We use DoubleClick’s ad-serving platform to deliver and monitor ads for our service. There can be no assurance that our agreement with DoubleClick, which is owned by Google, will be extended or renewed upon expiration, that we will be able to extend or renew our agreement with DoubleClick on terms and conditions favorable to us or that we could identify another alternative vendor to take its place. Our agreement with DoubleClick also allows DoubleClick to terminate our relationship before the expiration of the agreement on the occurrence of certain events, including if DoubleClick determines that our use of its service could damage or cause injury to DoubleClick or reflect unfavorably on DoubleClick’s reputation.

A very interesting and candid read. The rest here.

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