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Pandora shares clobbered in morning trading

The Web radio service is hugely popular but is also deep in the red. A day after company earnings disappointed Wall Street, investors are fleeing.

Pandora co-founder Tim Westergren James Martin/CNET

It wasn't as if Pandora investors needed much to send them stampeding out of the stock.

Pandora shares are trading this morning at $10.82, down more $3.43 or 24 percent, a day after the company failed to meet analyst expectations for its fiscal fourth quarter, which ended January 31.

Skepticism has dogged this company ever since it announced plans to go public a year ago. Any misstep was bound to spook Wall Street.

Pandora's revenue for the period fell short of estimates while the company's losses grew from the same time a year earlier. Fourth-quarter sales came in $81 million, missing the $83 million analysts had predicted. The loss for the quarter was $8.1 million, up from the $3.9 million from the same period a year earlier.

Pandora is a much-loved Internet radio service that enables people to listen to personalized stations that are tailor-made based on their tastes. Instead of paying the record labels a licensing fee for streaming rights, Pandora pays a statutory rate set for Webcasters. While this is less expensive, it is not cheap. In addition, the statutory rates are scheduled to rise for years to come.

Pandora offers an ad-supported service that is free of charge to users but limits them to 40 hours of free listening per month. Another service, called Pandora One, costs $36 annually and offers unlimited commercial-free listening. Since most of the users choose the free-of-charge service, advertising is vital to Pandora.

In the company's earnings report yesterday, Pandora execs blamed soft consumer advertising for the shortfall in revenue. My music industry sources say the company's troubles are what they've always been. The company can't seem to turn its large audience into cash.

Back in June, when I wrote that Pandora was a good service but a bad investment, I spoke to Laurie Anderson, a spokeswoman for SoundExchange, the entity that collects music royalties from Pandora.

"Everyone will be watching to see if they can figure out how to monetize their users in other ways (besides advertising)," Anderson said at the time. "Because the rate they pay is based on per-spin, more listeners doesn't make them more profitable. It doesn't solve their problems. They have to make each listener more profitable."