‘Tis the season for web-based IPOs. After LinkedIn’s (LNKD) volatile launch and the much-maligned Groupon IPO filing, Pandora is readying their IPO as well. While I like the music service as an alternative to my Sirius (SIRI) satellite, I certainly won’t be investing in Pandora’s IPO. My reasons are both anecdotal and market-based.
- Ads – Since I’ve been an avid user for probably over a year, I can’t help but notice the constant bombardment with the same commercial over and over. Every few songs, I get the same ad for LivingSocial. This is distressing from a few different angles. First off, I’m already a LivingSocial customer, so it’s rather annoying (and futile) and as soon as a less intrusive music service comes along, I’ll try that. Next, it begs the question as to the interest from a broader advertiser base and their ability to target ads to consumers (which is where their supposed value proposition lies). If Pandora can’t figure out after hitting me with 14,321 commercials from the same advertiser that I’m not going to convert on another showing, it really calls into question the legitimacy of their ad targeting – and what kind of ad dollars they’ll ultimately attract from newer advertisers. Not to mention, when LivingSocial ultimately implodes (as Groupon will, but at least they’re funded by Amazon AMZN), there goes a huge chunk of revenue.
- Low Barrier to Entry – Let’s face it, the Pandora business model isn’t exactly tough to duplicate. In fact, wouldn’t it be in the best interest of record labels to strike as many deals as possible with various Pandoras of the world? To them, it’s just incremental revenue and an expansion of ad deals would incur more lucrative negotiated terms as opposed to dealing with just a few providers. To sign off on truly “exclusive” content deals with Pandora (which would be the ONLY way to ensure a high barrier to entry) would be suicide. So, in the future, you’ll see many competing similar services. Wait! We already do – like Apple’s (AAPL) recent foray into cloud music and many other entrants on the way like Google (GOOG) and Amazon (AMZN).
- Why Now? This is the biggest criticism of Groupon, LinkedIn, some of the questions around Facebook’s portended 2012 launch and virtually the whole space (see how to invest in Facebook, Twitter and More). There are plenty of opportunities to raise ample capital through private equity and venture capital firms, so why go public now? Are founders trying to enrich themselves? Is the bubble getting ready to burst and it’s a great time to sell at the top? After all, the private equity IPOs timed their sellouts pretty well, right? This is what smart money does – sell high.
These are some of the questions retail investors should be asking themselves. Not only will there potentially be a huge opening day runup before they get a chance to get in, but is it a good idea to be jumping into a euphoric bubble IPO with so much downside risk?
Disclosure: Long positions in GOOG, AMZN and AAPL; no position in other stocks mentioned in this article.