Warning Signs

Keith Meister, founder of the hedge fund Corvex Management (Pandora's largest shareholder), is pushing Pandora Media (P  ) to sell itself. Among Mr. Meister's concerns are an abrupt leadership change and lack of song rights -- in his eyes, both suggest Pandora's imminent demise. As such, Mr. Meister thinks it makes sense for Pandora to sell itself to Spotify or Sirius XM (SIRI  ), two of Pandora's biggest rivals in the online music service industry.

Spotify has more global subscribers, Sirius XM dons superior revenue per user, and Pandora's other rivals-- Apple (AAPL  ), Amazon (AMZN  ) and Alphabet (GOOGL  ) - have infinitely deeper pockets. Since January, Pandora's stock price has fallen 21%, and active user growth has stalled -- from 81 million (two-quarters ago) to fewer than 80 million last quarter. Analysts attribute these declines to an increase in music-royalty fees (starting last December).

Historically, Pandora has relied on advertising fees for revenue. But recent poor performance reveals this strategy's shortcomings. As such, Pandora has tried to diversify, purchasing Ticketfly in November for $450 million. Unfortunately, Ticketfly contributed only 7% to Pandora's first-quarter revenue of $300 million. Furthermore, investors lost confidence when Pandora's chief executive, Brian McAndrews, abruptly stepped-down last March.

According to Mr. Meister, because of strategic purposes, numerous parties could be willing to pay a substantial premium for Pandora. For instance, Spotify recently raised $1 billion in additional capital, and faces pressure to go public - as such, Pandora's substantial user base and advertising sales operation make for an attractive add-on. Additionally, Sirius XM, a $20 billion satellite radio service, could reap substantial benefit from Pandora's popularity on mobile devices. Similarly, Apple is looking to make iTunes more assessable to the every-day user, and Pandora's simple interface is a possible solution.

A Rebuttal

While Pandora's active listeners dipped to 79.2 million last quarter, a year ago, the online media service served 75.3 active listeners. So there has been growth. But still, skeptics assert that Pandora will be replaced by tech giants "that have made digital radio the new new battleground as iOS and Android battle for mobile supremacy."

According to a recent Investopedia piece, such pessimism is unfounded as Pandora has seasonal tendencies. For example, at the end of 2013, Pandora recorded 76.2 million active listeners, but three months later, this number dipped to 75.3 million. In addition, listener hours per active user hit a new record this quarter.

Disruptive technologies are mortal - as we progress in society, they themselves are disrupted by superior technology. When looking at certain aspects of Pandora's performance- like a sequential down-click in active users- disruption can seem imminent.