Pandora Internet Radio by Pandora Media is a streaming music service. Its free advertising-supported radio service was first launched in 2005. Pandora users streamed 20.03 billion hours of Internet radio during 2014. In December 2014, there were 81.5®million active users of Pandora, making it the largest streaming music service currently. Pandora has a database of over 1,000,000 songs from over 125,000 artists.
Pandora offers its streaming music through two services:
1. Free Service: This option allows the listener access to the music by including advertisements.
2. Pandora One: This option is a paid subscription model without any advertisements; it also allows users to have more daily skips and longer listening times.
While Pandora currently has plenty of cash from its investors, it has yet to generate a profit since its inception. Pandora is facing increasing competition from sources such as Apple Music (approximately 6.5 million subscribers in 2015), Spotify (approximately 20®million paid subscribers in 2015), and other streaming services. In addition, Pandora's costs in some areas are increasing.
When Pandora released its earnings for the third quarter of 2015, earnings were less than expected by investors and Pandora's stock price fell sharply. Following are excerpts from Pandora's statement of operations, both in dollars and in common-size formats. (These excerpts are condensed for educational use only.)

Requirements
1. Using the statement of operations excerpt in dollars, what can you say about how Pandora is doing in the third quarter of 2015 compared to the third quarter of 2014? What can you say about how Pandora is doing for the nine months ended September 30, 2015 compared to September 30, 2014? Can you tell if the rate of increase is greater for revenues or expenses from 2014 to 2015? Why or why not?
2. Using the statement of operations excerpt in dollars again, why is the loss from operations larger in 2015 than in 2014?
3. Using the common-size statement of operations excerpt, what can you say about how Pandora is doing in the third quarter of 2015 compared to the third quarter of 2014? What can you say about how Pandora is doing for the nine months ended September 30, 2015 compared to September 30, 2014? Is the rate of increase greater for revenues or expenses from 2014 to 2015?
4. Using the common-size statement of operations excerpt again, why is the loss from operations larger in 2015 than in 2014? Also, what can you say about the mix of advertising revenue versus subscription revenue?
5. Which statement (dollars versus common-size) is more useful for analyzing the financial performance of Pandora in this case? Explain.

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Pandora Medla, Inc. Excerpt from Condensed Consolldated Statements of Operatlons - In DOLLARS (In thousands, except per share amounts) - UNAUDITED Three months ended Nine months ended September 30, 2014 September 30, 2014 2015 2015 Revenues 254,656 56,906 311,562 Advertising 9. 194,293 45,300 239,593 512,251 140,551 652,802 664,316 163,570 827,886 Subscription and other 10 11 Total revenue 12 Cost of revenue 13 Cost of revenue - Content acquisitlon costs 14 211,272 21,414 232,686 78,876 331,051 44,421 375,472 277,330 467,429 57,690 525,119 302,767 111,315 15,453 126,768 112,825 Cost of revenue - Other 15 Total cost of revenue 16 Gross profit 17 Operating expenses 18 Product development 19 38,288 200,416 81,369 320,073 (42,743) $ 13,381 72,320 29,143 114,844 (2,019) 21,849 107,286 35,603 164,738 (85,862) 56,466 285,595 111,169 453,230 (150,463) Sales and marketing 20 General and admlnlstratlve 21 Total operating expenses 22 Loss from operations 23 24 Source: Pandora Media, Inc., 3rd Quarter 2015, Financdal Results Pandora Medla, Inc. Excerpt from Condensed Consolldated Statements of Operatlons - COMMON-SIZE (In thousands, except per share amounts) - UNAUDITED 4 Three months ended Nine months ended September 30, 2014 September 30, 2014 2015 2015 Revenues Advertising 10 81% 19% 100% 82% 78% 22% 80% 20% 100% Subscription and other 18% 100% 11 Total revenue 12 Cost of revenue 13 100% Cost of revenue - Content acquisition costs 46% 68% 7% 75% 25% 51% 7% 58% 42% 56% 7% Cost of revenue - Other 15 Total cost of revenue 16 Gross profit 17 Operating expenses 18 14 53% 47% 63% 37% Product development 19 Sales and marketing General and administrative 21 Total operating expenses 22 Loss from operatlons 23 6% 30% 12% 48% -1% 7% 34% 11% 53% -28% 6% 31% 12% 49% 7% 34% 13% 55% 20 -7% -18% 24 Source: Pandora Media, Inc., 3rd Quarter 2015, Financial Results