As most people who follow the media are aware, Pandora is in the midst of trying to go public. This event has given perhaps the best insight into the financial workings of an Internet radio company yet. Pandora represents one of Internet radio’s largest companies and insight into their business gives satellite radio investors a look into the business model of Internet radio as well as more details about a company that will increasingly be seen as a competitor.

On April 4, 2011, the company filed an S-1 form with the SEC. The document (well over 100 pages) gives us even more insight than before. Some interesting tidbits from the filing include the number of registered users, amount of listening, revenue derived, and their royalty rates.

One common misconception about Pandora is the royalty rates the company will be paying. The S-1 filing spells this out quite clearly on page 74 of the document. Pandora opted out of the CRB rate and negotiated separate rates for their subscription and non-subscription models. As you can see the rates for non-subscription listeners is far less than the CRB rates.

Another aspect about Pandora that is heavily debated is their number of registered users and the number of hours people listen to the service. The company now reports 82 million registered users and defines a registered user as anyone who has opened a Pandora account. These “registered users” listened to a total of 3.9 billion hours of music in the past year.

This equates to 47.56 hours per year per registered user, or less than an hour per week. In contrast the recent Arbitron Infinite Dial Study outlined that the average person tunes into radio 9.47 hours per week. Given these two statistics, we can assume that the vast majority of Pandora’s “registered users” do not actively listen to the service. In fact, if we do some rough basic (rough) number crunching the number of active users could be in the neighborhood of 8 million, with actual paying subscribers likely somewhere between 500,000 and 700,000.

Another interesting aspect of Pandora’s business is their shift toward a subscription model. In the past two years the company has seen revenue from subscriptions increase from 6% in 2009 to 9% in 2010 to 13% in the most recent year ended January 31, 2011. Clearly the subscription revenue is a growing part of the business and will continue to be an increasing part of the Pandora business model moving forward.

In the past year Pandora was able to generate $137 million in revenue and posted a very modest loss. The company is on the verge of profitability and given their ability to generate substantial revenue from a modest amount of advertising, they could be a profitable concern as early as this year. Certainly Pandora will oft be spoken of in the same circles as Sirius XM and other media companies going forward.

[Pandora SEC Filing]

Position – Long Sirius XM Radio