Deconstructing Pandora’s S-1

Pandora’s IPO filing with the SEC (S-1 form here) revealed some interesting information about its customer base, sources of revenues, licensing costs and other financial data. When I first saw the numbers, I got curious as to what the numbers meant. Here is what I could deduce:

Data from S-1

1. 9 month revenues: $90,123,000 (Jan-Oct, 2010)

2. Total registered users: 71m

3. Pandora has two classes of users:

• Free users who can listen to up to 40 hours of music per month. If a free user exceeds the 40 hour cap, he/she can pay $0.99 to remove that limit for the rest of the month.

• Subscribers who pay $36 per year ($3/month) to get higher quality audio and no ads.

4. 13.6% of revenues come from paid customers (subscribers as well as users who paid the $0.99 for overage)

If we assume that all registered users are active and all of the paid customers are subscribers (i.e. we ignore overage users), we have:

Revenue Mix

• Revenues per month = $10.01m ($90.12/9)

• Revenues from paid customers per month = $1.36m ($10.01*13.6%)

• Revenues from free users per month = $8.65m ($10.01 - $1.36)

• Number of paid subscribers = 0.45m ($1.36/$3)

• Number of free users = 70.55m (71m – 0.45m)

86.40% of the revenues are generated by the free users.

Implied CPM

If we assume that on an average each free user listens to 15 hours of music, we have:

• Number of songs streamed per month = 257 (15*60/3.5, assuming an average 3.5 mins per song)

Pandora shows an ad for every three songs on an average. It also shows an ad when the user interacts with the Pandora application (skip or rate a song). There is limit of 10 skips per hour. But let us ignore all the skipping/rating part for a moment.

• Advertisements per song = 0.33 (1 ad per 3 songs)

• Number of ads per month per free user = 86 (257*0.33)

• Total number of ads served (all free users) per month = 6047m (86 * 70.55)

• Implied CPM = $1.43 ($8.65/(6047/1000))

Now that's a pretty low CPM! I am also assuming that all registered free users are active listeners which is certainly a stretch. If we assume only 50% of free users are active, we get:

Implied CPM = $2.86 ($8.65/(3023/1000)) which is also fairly low.

We can also do a backwards calculation to estimate % of active users by assuming a reasonable CPM rate. Lets say Pandora's CPM is $10.

This gets an active free user % of about 14%.

Paid vs. Free Customers

If we assume a CPM of $10, the ARPU for free user is $10.32 (12 * $10*86/1000) vs $36.00 for a paid subscriber.