Pandora Takes A Big Step Overseas With Full Launch In Australia And New Zealand

Following its beta test phase launch in July 2012, Pandora Media (NYSE:P) has now taken an important step forward and launched its complete Internet radio service in Australia & New Zealand. While Pandora has a good market presence in the U.S., growing its active user base is going to be difficult amid increasing competition. International markets present a tremendous potential if Pandora can overcome complexities of acquiring content.

The company’s expansion into international markets is not only a growth initiative but also a strategic one. Given the increasing competition in the U.S. from players such as Spotify, Clear Channel Radio and potentially Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL) in the future, it makes sense for the company to diversify its geographic exposure. Furthermore, there is no doubt that the potential for subscriber growth in international markets is quite large as Internet penetration continues to rise and Internet-enabled device adoption increases. Though the populations of Australia and New Zealand are much lower than that of the US, the low penetration of Internet radio presents a good opportunity for Pandora.

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The Potential In Australia

Australia has a population of over 22 million residents and fewer than 1 million Australians listened to Internet radio in 2011. ^[1] Also, as of 2011, less than 9% of the population aged 14 and over in Australia used their smartphones to listen to the radio. ^[1] This is in stark contrast to the U.S. where, out of a population of 310 million, Pandora has more than 150 million registered users and close to 60 million active users. This suggests that there is an opportunity for Internet radio penetration to increase significantly in Australia. Negotiating royalty rates with artists and music labels is going to be an important element of the company’s international expansion strategy.

Why Just Australia & New Zealand?

Why is Pandora limiting itself to upscale and English-speaking countries at the moment? Given that most of Pandora’s users are free users and the business is supported by advertisements, there is an opportunity to expand in emerging markets such as China, India, Brazil and others. Pandora doesn’t have to face the issue of lower consumer spending capacity/willingness in these regions since the subscription model isn’t really its focus.

However, the challenge lies in acquiring content tailored to local tastes. As far as Australia and New Zealand are concerned, we think that Pandora can leverage a lot of content (English songs) that it already has. This wouldn’t be true in case of emerging markets, which makes us think it might be a while before the company starts looking at these regions. But above all, it needs to first turn its U.S. business profitable.

Our price estimate for Pandora Media stands at $9.75, implying a premium of more than 20% to the market price.

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1. ACMA Communications report 2010-11 [↩] [↩]