Long before there was a Spotify or an Apple Music, there was Pandora. One of the earliest streaming music services, it was founded in 2000, and built up a huge listener base—in fact, it is still the largest. But the digital music business has shifted dramatically since Pandora was first launched, and it looks as though the company is having a hard time keeping up with that transition.
On Thursday, Pandora’s stock price (P) tumbled by more than 30% after the company reported a third quarter loss of $85 million, or 40 cents a share.
It’s not that investors were expecting a profit from the company, mind you—Pandora has lost money since inception, and its most recent loss was well within the range of what the market had been forecasting. Revenue for the quarter also came in close to consensus expectations, at $311.6 million.
So why then did the stock suffer so much? Simply put, investors seem to be losing faith in the company’s ability to compete with well-funded giants like Spotify and Apple Music (AAPL).
According to Pandora’s latest financial statements, the company still has about $440 million in cash and investments on its books, so it’s not going to run out any time soon. But its cash pile is dwindling faster than expected, as the company’s costs continue to rise. That’s part of the reason why it lowered its guidance for the upcoming quarter and for the full fiscal year—it now expects revenue of about $1.15 billion.
Before Apple Music came along, Pandora looked fairly good compared to the rest of the industry. It has about 80 million active users, more than even Spotify has (although the latter has almost caught up). But it has only ever had a tiny fraction of paying subscribers—about 5% of the total. Just a month or so after launch, Apple already has more than twice as many paying customers, with about 6.5 million. Spotify has 20 million paying users.
As the recent IPO filing by French music service Deezer reinforced, streaming music is a pretty terrible business— especially the ad-supported kind, which has been Pandora’s model from the beginning. Deezer had to go public primarily because it needs to raise a ton of money just to pay the costs of providing music to its customers.
As Deezer explained in its filing, the number one cost is royalty and licensing payments to record companies and music publishers. And in some cases, the way those licensing deals are structured means that a company like Deezer or Pandora actually loses money even if its users stream a song millions of times. That’s because record labels that represent blockbuster artists push for terms that pay them a specific amount regardless of how many times a song is streamed.
Pandora pays somewhat less than some of its competitors because it is more like an Internet radio station than a play-anything style of service like Spotify. And the company reported revenue growth of 30%, which is impressive given its age. But it also reported that its customer acquisition costs more than doubled in the same period, and that’s a worrying signal. In a nutshell, it means the company is having to spend more and more in order to grow its user base.
All of which raises the obvious question: What happens when the money stops flowing? On Thursday, investors got a glimpse of that future, and clearly didn’t like what they saw.
You can follow Mathew Ingram on Twitter at @mathewi, and read all of his posts here or via his RSS feed. And please subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology.