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Pandora Media Inc. increased the size and price range of its proposed initial public offering on Friday, upping the total potential take of the deal by 43% ahead of the streaming media company’s public debut, which is expected to take place June 15th. Pandora said it now plans to sell about 14.68 million shares at a proposed price range of $10-$12 per share. The company had previously offered to sell 13.68 million shares at a price range of $7-$9 per share. The total value of the deal could reach about $176 million at the high end of its price range. The pricing of the stock puts Pandora’s valuation suggesting a total value of $1.94 billion at high end. The company, which has yet to turn a profit, first filed to go public in February. At the time, Pandora expected to raise $100 million. The steady increases are a sign that the IPO’s underwriters — Citigroup, Morgan Stanley, and JP Morgan Chase are the leaders, anticipate heavy demand for the company’s shares. The company expects to trade under the ticker symbol “P” on the New York Stock Exchange.

About Pandora

Pandora Radio is an internet radio service, recommendation service, and the custodian of the Music Genome Project. Users enter a song or artist that they enjoy, and the service responds by playing selections that are musically similar. Users provide feedback on approval or disapproval of individual songs, which Pandora takes into account for future selections. While listening, users are offered the ability to buy the songs or albums at various online retailers. As part of the Music Genome Project, over 400 different musical attributes are considered when selecting the next song. These 400 attributes are combined into larger groups called focus traits. There are 2,000 focus traits. Examples of these are rhythm syncopation, key tonality, vocal harmonies, and displayed instrumental proficiency.

The Music Genome Project is what powers Pandora’s personalization, as it is a detailed, hand-built musical taxonomy. Using this musicological “DNA” and constant listener feedback Pandora crafts personalized stations from the more than 800,000 songs that have been analyzed since the project began in January 2000. More than 75 million people throughout the United States listen to personalized radio stations for free on Pandora through their PCs, mobile phones and devices such as the iPad, and connected in-house devices ranging from TVs to set-top boxes to Blu-Ray players. Mobile technology has been a significant factor in the growth and popularity of Pandora, starting with the introduction of the Apple app store for the iPhone in the Summer of 2008. Pandora instantly became one of the most top downloaded apps and today, according to Nielsen, is one of the top five most popular apps across all smart-phone platforms. Pandora is mostly free and, thanks to connectivity, available everywhere consumers are – at the office, at home, in the car and all points in between.

In 2009 the Company announced that Pandora would be incorporated into the dashboard in Ford cars via SYNC technology; GM has already followed in announcing plans to integrate Pandora into its vehicles’ OnStar system. Since more than 50% of radio listening happens in the car, this was a crucial arena for Pandora.

The Oakland, Calif., company’s business is growing fast, averaging a new user every second. As of last April, Pandora had 90 million registered members, up from 80 million in February. Those members racked up 3.8 billion hours of listening to Pandora’s song stream last year. Founded in 2000 as the Music Genome Project, Pandora uses algorithms and user feedback to generate music recommendations for its listeners. The company claims a 50% share of all Internet radio listening time among the top 20 stations and networks in the United States, according to a November 2010 report by audience measurement firm Ando Media. Pandora offers listeners two options: A free, advertising-supported stream or a “premium” plan priced at $36 per year, which offers higher audio quality and no ads. Most of its revenue base comes from advertising. Revenue surged 150% to reach $137.7 million in the fiscal year ended Jan. 31, 2011. Net losses fell to $1.76 million from $16.7 million the previous year. Due to copyright and licensing rulings, Pandora is only available in the United States, but Pandora has said that it has plans to extend its service to a global market.

Financials

Revenue for the 9 months ended October 31, 2010 was $90.12 million. That’s an increase over 30.1 million over the same months in 2009. Net income in the first 9 months of 2010 was…a loss of $328,000. Pandora lost $18 million during the same months in 2009. During the first nine months of 2010, Pandora ad revenue reached $78 million. That’s up from $29 million during the same period in 2009. That’s huge growth. Subscription revenue was $12.3 million during the first 9 months of 2010. It was $4 million during the first 9 months of 2009. That’s huge growth.

Increasing Expense & Risk – “Royalties”

Pandora paid out 49% of its revenue to license the music it sends to listeners via its customized, online radio channels. Even more important, the key royalty rates that the still-unprofitable company pays to artists and music publishers are set to rise significantly during the next four years. Pandora agreed to give up the greater of 25% percent of its annual revenue, or another aggregate amount based on a royalty rate charged each time Pandora plays a copyrighted song. Pandora is consistently paying about half its revenue in license fees, or nearly double the 25% figure that was part of the agreement, provides a pretty clear indication of which party got a better deal. What’s worse for Pandora (and, soon, for its public shareholders) is that the rate for its license, known as a “pure-play license,” is calculated based on a sliding scale that jumps substantially over time.

For 2011, Pandora pays a per-performance rate of $0.00102 for songs played on its non-subscription service. That service, by the way, generated 86% of the company’s revenue for the nine months ended Oct. 31, 2010, according the company’s initial S-1 regulatory filing. By 2015, the rate goes up by more than a third, or 37%, to $0.00140 per performance. For music played on Pandora’s subscription service, which generated the other 14% of revenue during those same nine months, the company is paying a per-performance rate of $0.0017 in 2011. By 2015, that rate jumps a whopping 47%, to $0.0025. And, as Pandora itself says in its S-1 document, the company gets no volume discount on royalty fees. In other words, the more it plays, the more it pays. And those are not all the royalty fees that Pandora has to pay. It also has an agreement with the music publishing organization BMI that causes it to fork over another 1.75% of its “gross revenue,” and another with a similar group, known as SESAC, that pays out 0.38% of gross revenue.

Pandora detailed in its S-1, the company paid 48% of its revenue to acquire content. It clearly states that the company is at a disadvantage to its non-Internet rivals because “unlike traditional radio broadcasters, they must pay performance rights royalties for the digital audio transmission of sound recordings …”  The company’s S-1 filing also says this: “As a result of these (several) factors, we expect to continue to incur operating losses on an annual basis through at least the end of fiscal 2012.” When the company expects to be profitable, the prospectus doesn’t say. How it will pull that off while its biggest expense is rising by at least a third during the next four years is also a mystery. They will need the extra cash to continue the huge run-up in top line revenue growth that they are getting basically from advertising revenue.

Competition

Pandora’s increased IPO price also comes as competition is growing for how people listen to music. Earlier this week, Apple unveiled a digital-music service that will allow users to remotely access their songs. Meanwhile, Amazon.com Inc. (AMZN) and Google Inc. (GOOG) also offer similar products. Pandora admits in its filing that the three companies and Facebook pose a significant threat if they were to develop a competing Internet radio platform, because they likely would have advantages in resources, technology and services. For now, though, Pandora has a strong head start. According to a September 2010 report by Nielsen, a media measurement firm, the Pandora app is a top-five-most-used app across all four major smartphone platforms in the U.S.; in January, the Pandora app was the No. 2 all-time downloaded free iPhone app and the No. 1 all-time downloaded free iPad app, according to Apple.

Beneficiaries

Employees and investors who stuck with Pandora will be the biggest beneficiaries of the IPO. That’s because 8.68 million of the 14.68 million shares that Pandora now expects to sell in its offering are being sold by existing shareholders, which means most of the money raised in the offering will go into private hands, rather than onto the company’s balance sheet.

Here’s the full ownership table: