{"id":285538,"date":"2011-02-28T22:59:08","date_gmt":"2011-02-28T22:59:08","guid":{"rendered":"http:\/\/www.ghanamma.net\/2011\/02\/28\/not-pandoras-box\/"},"modified":"2011-02-28T22:59:08","modified_gmt":"2011-02-28T22:59:08","slug":"not-pandoras-box","status":"publish","type":"post","link":"https:\/\/www.ghanamma.com\/2011\/02\/28\/not-pandoras-box\/","title":{"rendered":"Not Pandora’s Box"},"content":{"rendered":"
\n
\"Pandora<\/a><\/p>\n

Pandora founder Tim Westergren<\/p>\n<\/div>\n

By Kevin Kelleher, contributor<\/em><\/p>\n

In 1995, Netscape went public<\/a>. Underwriters believed the stock was\u00a0worth $14 a share but demand was so strong they doubled the offering\u00a0price overnight. It rocketed to $75 a share on its first day. But\u00a0Netscape was a browser maker, with no clear plan to make money. In\u00a0time, it was bought by AOL, which in turn was bought by Time-Warner (TWX<\/a>) (parent company of Time Inc. and Fortune<\/em>).\u00a0And it all ended in tears.<\/p>\n

Two years later, Amazon.com (AMZN<\/a>)\u00a0went public<\/a>. The online bookseller had a\u00a0loss of $6 million and went public valued at $300 million. People\u00a0thought it was another crazy IPO: One analyst likened it to a\u00a0hallucinogen, quipping, “Some people smoke Internet inhalant and their\u00a0judgment gets bizarre.” But time proved their judgment sound. Amazon’s\u00a0stock has increased more than 100 times over its IPO price.<\/p>\n

Both IPOs are credited with launching what became the dot-com boom.\u00a0But amid warnings that companies like Facebook, Twitter and Zynga are\u00a0about to launch another crazy boom, it’s worth recalling a\u00a0often-overlooked lesson from the 90s: For every bomb like Netscape,\u00a0there is an Amazon, a true giant in the making.<\/span><\/p>\n

So it is with a new generation of companies. For every OpenTable (OPEN<\/a>),\u00a0which is up 344% from its IPO debut last year, there is a Mitel\u00a0Networks (MITL<\/a>), the IP-telephony company whose stock has dropped 61% since\u00a0its initial public offering last year. And the class of 2011 isn’t\u00a0likely to be much different. There will be winners, there will be\u00a0losers.<\/p>\n

But unlike a year ago, many are willing to write off most web startups\u00a0as actors in a drama re-enacting the dot-com bubble. Facebook is\u00a0valued at 25 times its revenue, and Twitter at 100 times. (Amazon, by\u00a0contrast, is trading at two times revenue.)<\/p>\n

And now Pandora is going public without having made a cent in net\u00a0profit. All we need is the Pets.com sock puppet to rise from the dead\u00a0and the present will have come full circle to a past we’d all rather\u00a0not remember.<\/p>\n

But Pandora is neither Netscape (a web company with no plan for\u00a0turning a profit) nor Amazon (a startup masterfully dominating the\u00a0online business it pioneered). It’s a typical IPO candidate \u2013 that is,\u00a0a company that has yet to post a profit but nevertheless offers a\u00a0reasonable promise of profit growth in the future.<\/p>\n

Pandora is actually a good example of how the tech IPO market should\u00a0be working in a time when people are worried about bubbles. It’s\u00a0raising money because it needs it, to pay for licensing fees and make\u00a0acquisitions, and while it hasn’t posted a net profit, it’s operating\u00a0costs are coming down fast enough to make it a reasonable expectation\u00a0that it will soon do so.<\/p>\n

Pandoras operating loss shrank to $15.5 million in the fiscal year\u00a0through January 2010, down from a $27.4 million loss a year earlier.\u00a0In the first nine months of 2010, Pandora posted an operating profit\u00a0of $819,000 as revenue tripled to $78 million.<\/p>\n

So while Pandora posted a net loss in the first nine months of last\u00a0year \u2013 due to interest expenses and the effect of recognizing stock\u00a0warrants at fair value \u2013 it’s profitable at the operating level,\u00a0having shown a steady pattern of increasing revenue while holding\u00a0operating costs down.<\/p>\n

Content acquisition, or the licensing fees Pandora pays, fell to 50%\u00a0of revenue in the nine-month period from 72% a year earlier. Marketing\u00a0and administrative costs fell to 35% of revenue from 53%. Cost of\u00a0revenue, largely the costs of adding and maintaining networking\u00a0infrastructure, fell to 9% from 19%.<\/p>\n

There are certainly risks. Pandora’s prospectus lists 25 pages worth\u00a0of risks facing investors, some of it more than the usual legal\u00a0boilerplate. Streaming music online is a nascent business, with stiff\u00a0competition and the presence of greedy, inflexible music labels who\u00a0are afraid of new technologies. Licensing costs will always eat up a\u00a0good part of Pandora’s profits, regardless of whether ad revenue is\u00a0rising or falling.<\/p>\n

But those risks aren’t unusual for a company going public. In fact,\u00a0Pandora in 2011 looks a lot like Netflix (NFLX<\/a>) nearly a decade ago. Netflix\u00a0went up against established video-rental chains with a DVD-by-mail\u00a0model that was easy for others to copy. Since then, Netflix has\u00a0pioneered the nascent industry of streaming video.<\/p>\n

Netflix has succeeded because of smart management and a service that\u00a0is easy to use and builds user loyalty. Pandora has been following\u00a0that formula, with users listening to 13 hours a week to its music.\u00a0The company claims to control more than half the market for Internet\u00a0radio stations.<\/p>\n

Of course, Netflix has always had its share of doubters, just as\u00a0Pandora’s IPO is being greeted by skepticism. But Netflix ended up\u00a0being more Amazon than Netscape. Now that we can expect to see more\u00a0web companies go public in coming months,\u00a0 it’s important to know how\u00a0to tell the companies with more buzz than business plan from the ones\u00a0that have a decent shot at being good investments.<\/p>\n

More from\u00a0Fortune<\/em>:<\/strong><\/p>\n

<\/span><\/span><\/span><\/div>\n<\/p>\n

<\/p>\n

Go here to see the original:
\nNot Pandora’s Box<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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