Pandora’s latest quarter disappoints investors

In what has become a very competitive landscape for digital music, early pioneer Pandora is trying to remain a leader.

The company reported third quarter earnings after the bell on Tuesday, giving a glimpse at the current health of their business. Pandora has seen its revenue grow to $351.9 million, up by 13% from the same period last year. Yet analysts had been expecting $366.1 million.

Adjusted earnings per share also missed the mark, with a loss of 7 cents, instead of the 6 cents Wall Street was forecasting. The stock fell about 8% in the initial after hours trading.

Advertising revenue came in at $273.7 million, up 7% year-over-year, but beneath the $286.9 million that analysts predicted. Ticketing service revenue was $22.1 million, an area that saw 25% growth, yet also fell slightly beneath Wall Street expectations.

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Listener count has been in decline, falling to 77.9 million compared to 78.1 million in the same period last year. If this continues to slip, Pandora may not have a wide enough funnel of free users to upsell to its new streaming products.

The best opportunity for Pandora remains with Ticketfly, the concert ticketing company it acquired last year for $450 million. If it can occupy its own Pandora ad space with targeted promotions for Ticketfly tickets to concerts from the artists a user is currently listening to, it could earn much more than selling the ad inventory to other companies.

“Pandora’s transformation continues with the launch of compelling new products and partnerships that open up significant revenue streams,” said Tim Westergren, founder and CEO of Pandora.

Last month Pandora, launched its $5/month enhanced radio service that removes ads plus offers offline playback and more song skips. But it may be too little too late. Spotify has offered a free Internet radio service for years with unlimited skips, while $10/month not only removes ads and provides offline playback, but lets you listen to exactly what songs you want whenever you want.

Pandora’s model simply hasn’t aged well. Traditional radio, where users had no control over what they heard beyond changing the station, was more a byproduct of technological limitations than a service tailored to user behavior. Pandora simply translated that model to the web with a little “thumbs up / thumbs down” personalization. But when people hear a song they love on the radio, they want to be able to listen to it over and over. Radio is becoming a feature of on-demand streaming services, limiting Pandora’s growth potential. Though it plans to launch a true on-demand service based on its acquisition and mercy killing of Rdio, competitors like Spotify, Apple Music, and YouTube may be too far ahead to catch. And since music is social, network effects come into play. People want to be on the same streaming service as their friends so they can share songs. They’re not going to find that with Pandora on-demand.

Now concerns about competition have been impacting Pandora’s stock. Shares of the company have fallen about 14% in the past month, closing Tuesday at $12.18. The company has a market cap of $2.8 billion.