How Pandora Media, Inc.'s New Acquisition Could Accelerate Growth

With over 79 million monthly active listeners tuning in last quarter alone, Pandora Media arguably has a better grasp than any other company on consumers' music preferences. After all, the Internet music streaming company largely made its name by allowing listeners to create "stations" based on a particular artist or genre, which, in turn, could be customized based on whether the user liked or disliked each song.

Pandora's "Next Big" thingBut lucky for investors, Pandora is about to get even better at what it does best. To be sure,Pandora recently announced it has acquired Next Big Sound,a music data analytics service that could not only help it become more attractive to consumers and artists, but also significantly increase Pandora's value proposition to advertisers.

Since launching in 2009, Next Big Sound has collected "public social data for hundreds of thousands of artists," which it then correlates with its own proprietary sales and streaming algorithms to help more than 85% of the recorded music industry make crucial marketing and promotional decisions. Next Big Sound also helps the music industry quantify social media exposure, understand the impact of their marketing and promo events, and even deploy predictive algorithms to identify high-potential artists earlier in their careers.

Regarding the aforementioned 85% figure, Next Big Sound elaborates on its website: "These trusted partnerships with labels, artist managers, publishers, agents, and major technology leaders are a large part of what makes Next Big Sound the definitive analytics and insights provider for the music industry."

If that quote sounds familiar, it's because Pandora management regularly voices similar goals regarding its own role in the music industry. During their most recent quarterly conference call, for example, Pandora CEO Brian McAndrews stated,

Music to investors' earsIt would seem, then, Next Big Sound is an ideal fit to help Pandora not only improve the quality of its product, but also further its ambition to strengthen industry relationships.

That's not to say Pandora has had trouble improving its top and bottom lines without Next Big Sound's help. Last quarter, Pandora increased revenue 28% year over year to $230.8 million. That includes a 35% jump in mobile sales to just over $181 million and a 67% jump in local advertising to $43.3 million. Advertising revenue overall increased 27% to $178.7 million. And though that translated to adjusted net loss of $24.9 million, or $0.12 per share, keep in mind in these early stages, Pandora is focused first on revenue growth and grabbing market share as it inches toward sustained profitability. What's more, analysts were anticipating sales of just $224.6 million and an even wider net loss of $0.17 per share.

The market was decidedly less impressed, however, with the size of Pandora's listener base, which grew only 5.1% year over year to 79.2 million -- or roughly 1 million listeners below consensus expectations. Even so, Pandora insists it expects to eventually grow to a base of around 100 million in the U.S., and that in the meantime investors should be paying more attention to the loyalty of those listeners instead. To be sure, Pandora's user engagement rose to an all-time high last quarter at 22.3 hours per active user per month, and also eclipsed a 10% share of the total U.S. radio listening market for the first time -- up from 9.1% in the same year-ago period.

As Next Big Sound helps Pandora better understand the preferences of its listeners, as well as how to most effectively reach them, it seems fair to expect this loyalty should only continue to increase. If that happens and Pandora continues to gradually take the remaining 90% market share its terrestrial competitors still command, an increased flow of advertising dollars into Pandora's coffers should follow. In the end, that's why I think investors would be wise not to underestimate the impact of Pandora's latest acquisition.

The article How Pandora Media, Inc.'s New Acquisition Could Accelerate Growth originally appeared on Fool.com.

Steve Symington owns shares of Apple. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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