There is an interesting story behind the story that is written about Pandora in this article: From near death to profitability. Profit, it claims, is expected to occur by the end of the year for Pandora. If the information presented is accurate, Pandora is generating an annualized $40 million in revenue from 35 million users: $1 per user per year. Less than $0.10 per month. Something about this picture is very telling, and may prove over time to make a great case study in web entrepreneurship. Depending on whether it is the 35 million users, or the $1, that is the value driver, Pandora may be a home run, or much less so, for its shareholders. Regardless, in the currently capital-challenged environment, we are beginning to note an important dichotomy among web distributed business models: these either generate value through hugeness and critical mass, or else through a low cost structure and recurring revenue base. The in-between zone, the middle, is where the shareholder pitfalls reside.
A quick look at the extremes. At one end of the spectrum, where we find, for example, Twitter and Facebook, the value is in the size (that does not have to directly equate to revenue or profit, and Twitter has neither), which carries tremendous benefits to a variety of constituencies. There is the information that is gathered from users, there is the very fact that users are all there in one location to be studied, promoted, acquired. In one form or another, this will directly or indirectly, in the near or less near future, result in dollar opportunities that are real… but that can only result from a very large platform that is not easy to replicate.
At the other end of the spectrum, there are the more modest projects, the business models that may be niche oriented and low-scale, but that have a compelling and recurring revenue base and, ideally, a low-cost operating profile. These may never be sensational IPO candidates, but could create value for shareholders that is immediate and reliable. An early such prototype and pioneer in his own way has been Matt Drudge with his report, reputedly a cash machine; and we are seeing similar concepts, but of a more institutional nature, prevail with the new generation of blogs and aggregators… the Business Insiders, the Huffington Posts, the GigaOms… and other businesses in a whole range of segments from B2B services to iPhone apps.
But now the dreaded middle, the neither fish nor fowl. These are the expensive to maintain offerings that are neither profitable nor enormous. Pandora may not be a fair example, but is worth a look. In its case we have a $40 million revenue run rate that is not quite sufficient to cover costs, and so value has to be derived elsewhere. Does this platform and its 35 million users constitute sufficient scale for a lucrative M&A or IPO exit? We shall see, and the most interesting part of the case study, which will emerge with time, will be the lessons it may contain about the nature of users, and various gradations of value assigned to types of audience. Is the value of a Twitter tweeter, for example, the same as that of a listener to a song? And does “enormity” in the real-time web have the same definition as in other Internet segments?
Regardless of the answers, we have to monitor and take note… because Pandora is one of the largest platforms in its field. More often than not, those candidates for the “dreaded middle” will not even come close. Avoid before it happens.
