Pando

With $350M in new funding, is Spotify really worth twice as much as Pandora?

By David Holmes , written on May 1, 2015

From The News Desk

The music streaming wars just got even more interesting.

Sources tell CNBC that Spotify has raised $350 million in a new round of funding with "one of the large commitments" coming from Goldman Sachs. That would bring Spotify's total cash haul through private funding to almost $900 million and give it a headline-grabbing valuation of $8 billion -- up from $5.7 billion last January -- which many observers have noted is over twice Pandora's market capitalization.

But is it logical to say that Spotify is worth twice as much as Pandora? After all, Pandora has more active users -- 81.5 million to Spotify's 60 million -- and the most recent report of Spotify's revenue and costs show that it lost $80 million in 2013, compared to Pandora's $30 million in operating losses last year. (Unlike Pandora, Spotify is still a private company and so more recent figures are not known).

It should be noted that private company valuations can be, in the parlance of Slack founder Stewart Butterfield, "arbitrary as fuck." And there are completely different pieces of information to consider and vastly different stakes when evaluating private companies and public companies. Nevertheless, it's still a worthwhile question: Are Spotify's prospects vastly better than Pandora's?

Despite the fact that the now octo-unicorn has fewer users and greater losses, Spotify has some definite advantages inherent in its business model. Because it is predominantly an on-demand streaming service -- meaning you search for a song, press play, and go -- it's been easier for Spotify to spread internationally. Spotify negotiates royalty payments directly with labels while radio royalties are subject to a number of governmental regulations here in the US and abroad. That's why Spotify is today available in 64 countries while Pandora is only available in the US, Australia, and New Zealand. And as more and more of the developed world's citizens gain regular access to the Internet -- particularly via mobile devices -- that opens up a huge potential market for growth that Spotify can tap into more easily.

Speaking of government regulations on radio, these could potentially hamper Pandora's profit potential in other ways besides international growth. The Department of Justice may soon make changes to rules surrounding how royalties are paid that have been in place since 1940. Contrary to what some argue, these changes won't likely decimate Pandora's business model. That said, it's inarguable that Pandora's future will be impacted more by the dalliances of the DOJ and Congress than Spotify's.

Spotify also has a much bigger opportunity than Pandora to monetize its users through subscriptions. Both services offer a paid option, but Pandora has only convinced 3.3 million of its 81.5 million users to drop cash in order to avoid ads, whereas Spotify has convinced 15 million of its 60 million users to pay. That's because Spotify's paid tier not only rids the service of ads; it also makes it available on mobile devices, where usage of all services across the board has begun to migrate, particularly internationally. Furthermore, consumers are perhaps more accustomed to tolerating ads on radio than on on-demand services like Spotify -- after all, advertisements have been a mainstay of radio for years, whereas Spotify more accurately recreates the experience of listening to full albums, and no one wants to hear a diaper commercial in the middle of Dark Side of the Moon. While Pandora's advertising schemes have become more sophisticated of late -- and will likely continue to become more lucrative -- the revenue potential of collecting subscription fees directly is far greater on a per-user basis than that of revenue supported by ads.

And finally, while it may lack the sophistication of Pandora's offering, Spotify offers radio to US customers as well. And while I know that Pandora's service is better, for my part I still use Spotify when I feel like listening to the radio because I'm lazy and would rather have all my music consumption take place in one app

One big indicator of Spotify's future will be if it continues to attract users at a fast pace -- fast enough to surpass Pandora where user growth is still growing but more slowly. In truth, however, this whole conversation may be moot. After all, Apple is soon preparing to take on the streaming space by rebranding Beats Music. And with 800 million credit cards on file, Apple/iTunes only has to convince 7.5 percent of them to sign up for its music streaming service in order to have more users than Spotify.

Victory is far from certain for any player in streaming music. But if you're operating in this space, there's no shame -- and a decent bit of wisdom -- in being scared of Apple.

[illustration by Brad Jonas]