For Pandora, Customer Retention Is More Important Than Expansion

Not much seems to be going right for Pandora (NYSE: P) of late, despite its efforts to trigger a revival. In the recently concluded quarter, the company’s revenues and active listeners once again fell short of analyst expectations, which sent the stock crashing. Pandora also had a change in management in Q3, and the company’s new CEO Roger Lynch hinted at new retention strategies for its existing user base before expanding. The decline in Pandora’s user base can be primarily attributed to the increased competition in the digital music streaming industry, with the entry of big players such as Google, Apple, and Amazon. At this point in time, it makes sense for Pandora to be focusing on retaining and upselling its existing customer base rather than expanding aggressively, as many of its competitors are currently equipped with better features. It may be difficult for Pandora to attract users from other players in the near term, but it can certainly take steps to minimize its customer churn.

Why Pandora’s User Base Is Declining

Pandora’s active subscribers declined in seven out of the last 8 quarters. Additionally, out of the 93 million users who visit Pandora on a quarterly basis, only 74 million are active monthly. The relentless competition in the digital music space has been eating away at the company’s user base. The competition has further intensified, with players such as Spotify, Apple, Google and Amazon expanding in the streaming market. It has become extremely difficult for Pandora to attract the customer bases of these players. Pandora’s advertising revenues grew just 1% in the recently concluded quarter despite the increase in average ad prices. These are not good signs for Pandora going forward, and we expect these headwinds to continue for at least the next couple of quarters.

Pandora Needs To Stabilize First, Expand Later

As a result of last few quarters’ disappointing results, the company has decided to upsell its existing customer base in the short term through better packages and new features such as Pandora Premium. The company also withdrew from its New Zealand and Australia businesses last quarter, which upset some investors as the company retreated internationally rather than expanding. However, we believe that focusing on its current user base is a good strategy for Pandora as its first priority should be stemming its user churn. The company has done well to increase its ads per hour to about five, but it needs to remain careful going forward as too many ads may lead to churn.

Pandora Premium was fully launched in mid-April and now has more than 500,000 trial users since then. The initial user reviews of premium have been positive, attributable to its interactive interface, new playlist features and ease of use. However, Pandora has been late in entering the on-demand music service, and it will be difficult for Pandora to convince Spotify’s and Apple Music’s users to make a change. In addition, Spotify and Apple Music boast a library of over 30 million songs compared to Pandora’s 1 million. Therefore, we expect the company to have some difficulty attracting premium users early on.

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