I had an opportunity to buy shares in the Pandora IPO but chose not to. If I was a super active trader and had stayed on top of it I could have made a fair bit of money as the stock popped by about 60% in early trading but closed even the first day up only about 10% from its IPO price. Yesterday, only a couple of days later, Pandora is trading below its IPO price. Today the price is down a bit more.
Why did I not jump on Pandora? There are two key reasons. First, I spent a bunch of time reading blog posts dissecting the S1. There were a couple that really caught my attention. One is a post pointing out that Pandora has no patents of their own in a field that is full of patents and where they are likely to be sued. Without patents of their own to cross license, that can become a very expensive proposition quickly. Another post that I thought was very worthwhile looked at the path for Internet radio royalty rates, which are set to rise over time. That’s a potentially big problem for Pandora as well as it means that they need to run more ads to maintain profitability which will degrade the user experience.
Speaking of user experience, while Pandora makes for good listening, the service is otherwise not very engaging and hasn’t seen much (any?) innovation in quite some time. Yes, Pandora has taste data on listeners, but I don’t think the switching costs are significant. New and innovative services such as Soundtracker (mobile + location), have a terrific out of the box playlist algorithm. Soundtracker is also more social than Pandora as users can create stations which others can discover and play. Social front and center for emerging services such as turntable.fm where multiple DJs can run a room. One or more of these may wind up creating a real network of listeners (and possibly artists as well - more on that in another post). That is likely to be much stickier than Pandora’s experience.
I am happy with my decision not to buy Pandora shares. What might change my view is if they now take their cash and public currency and buy one the emerging services and/or start adding social elements to Pandora. Neither one of these paths is assured success, but the worst case would be to see no social innovation. In the meantime, I will continue to look at upcoming IPOs and be sure to either thoroughly read the S1 myself or at least search through posts
