Pandora Hopes That Video Saves the Fading Radio Star

Pandora (NYSE: P) may be falling out of favor with both investors and music fans, but it's hoping that a new video ad platform will help improve its standing on both fronts. Pandora announced Tuesday that it's making Video Plus available to all of its advertisers.

Video Plus allows Pandora's non-paying customers to enjoy some of the perks it offers premium subscribers in exchange for viewing 15 seconds of a video ad. Opting in on the brand-building eye candy allows accounts to temporarily replay tracks or skip more songs. Some will argue that this is a dumb move, giving more of Pandora's freeloaders a reason to stay that way. There's not much of an incentive to pay up for Pandora Plus or Pandora Premium if an ad-supported account can unlock some of the most desired premium features by just putting up with a short commercial break. It's actually a brilliant move, especially now that Pandora is failing on converting the lion's share of its thinning audience into paying accounts.

Pumping up the volume

Pandora stock has been stuck in the single digits since mid-May. Everything seems to be going wrong. It lowered its full-year revenue outlook in its latest quarter, spurring a wave of price target downgrades. Profitability remains elusive. Pandora's audience continues to shrink, down to 76 million listeners at the end of June. Buyout speculation has faded, with Sirius XM Radio (NASDAQ: SIRI) settling for a minority stake this summer instead of swallowing Pandora whole.

The biggest disappointment at Pandora is its inability to migrate its ad-supported customers to pay platforms. The springtime introduction of Pandora Premium was supposed to arm the online music pioneer with the on-demand offering that consumers were gravitating to in this Spotify-loving world. It hasn't panned out. Pandora grew its paying subscriber base by just 150,000 premium accounts during the second quarter. There are just 4.86 million accounts on Pandora Plus or Pandora Premium, just 6% of its audience.

Video Plus may seem like an inconvenience to listeners, but it's one way to give the 94% of Pandora users that aren't paying a taste of what things could be like if they ever decide to pay up. Advertisers may prefer not to be part of a campaign that's thrust on music buffs that will merely tolerate the spot, but at a time when marketers are finding it hard to reach young audiences here's a perfectly affordable way to get noticed by millennials.

There's no denying that a disappointing launch of Pandora Premium played a part in the reduced top-line outlook for 2017. It's true that Sirius XM Radio may have dodged a bullet here by sidestepping an outright buyout of Pandora. However, with Pandora's advertising and subscription revenue still posting year-over-year growth, this isn't a broken company. Video Plus is a win-win for advertisers looking to be seen and freeloaders looking to stay that way.

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. The Motley Fool has a disclosure policy.