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Pandora Goes Out of the Box

The tempo is picking up at music discovery service Pandora. In a series of compelling developments, the star of free Internet radio is jumping out of your PC and looking to make money through other distribution channels.

The popular website allows its 6.9 million users to unearth new music by letting it know songs and artists that they already like -- think Netflix (Nasdaq: NFLX  ) recommendations, but with a beat you can dance to.

First, you have the deal with Sprint Nextel (NYSE: S  ) that was announced yesterday. The deal allows for the streaming of Pandora's personalized radio stations through Sprint's Power Vision data plan phones. The service is free for 30 days, and then just $2.99 a month after that.

Then you have Pandora beaming out of home theater devices through the Sonos Digital Music System and Logitech's (Nasdaq: LOGI  ) Squeezebox and higher-end Transporter WiFi streaming appliances.

TechCrunch also covered a pre-announcement of a SanDisk (Nasdaq: SNDK  ) portable media player that was on display, capable of streaming customized Pandora playlists through Zing's WiFi functionality.

This trend may be a bigger threat in the near term to satellite radio and music subscription services than the iPod.

Name that iTune
When you couple Pandora's busy week of introductions with the buzz surrounding the upcoming debut of rival music discovery site Slacker's portable media player, it's easy to get distracted from the rollout of Apple's (Nasdaq: AAPL  ) iPhone.

Don't get me wrong. The iPhone, which combines phone, iPod, and Internet features, is going to be huge. However, Apple's mastery of digital music is going to be challenged by some unlikely heavy hitters providing value-minded access.

For music fans paying $13 a month to XM (Nasdaq: XMSR  ) or Sirius (Nasdaq: SIRI  ) for commercial-free music -- or even more for portable all-you-can-stream subscription services -- Pandora and Slacker are going to be tempting value propositions.

Think about it. Slacker is working on a free, ad-supported model. And who is going to pay Cingular $8.99 a month to play 25 XM music stations when you can get Pandora on your Sprint phone for a third of that price? Boom goes the dynamite, or at least some of the incremental revenue-generating models that satellite radio was counting on to grow its reach beyond the receiver.

Tomorrow's tunes
Then there's the higher royalty rates Internet radio stations will begin paying come mid-July. Companies like Pandora and Live365 are painting a gloomy picture if royalty rates triple over the next three years. With thinly monetized models that are light on profits, the consensus is that higher programming costs will kill small webcasters in the near term and bleed dry the venture capital of larger players. The survivors will be scrambling to promote unsigned artists who appreciate the exposure of free digital distribution.

But it may not come to that, if the paid search giants come through with the promise of audio ads to enhance their contextual marketing empires. The listener won't like it, but it's a living. The future can go either way at this point.

There will be other ways to roll with the changes. Take Pandora's deal with Sprint for instance. Folks can bookmark songs they like and purchase them as cell phone downloads. Yesterday's press release didn't explicitly state that Pandora would get a piece of that action, though it's hard to believe it won't get a hefty finder's fee.

There is still a chance that Internet radio royalties will be kept at feasible levels, but the companies that want to survive can't approach it that way. They need to begin seeing Internet radio as a loss leader, creating new revenue streams to last.

For Slacker and Pandora, the tune of opportunity is too snappy to ignore.

Netflix is a Motley Fool Stock Advisor pick. To see what other stocks are helping the newsletter service crush the market, take a free 30-day trial today.

Longtime Fool contributor Rick Munarriz isn't a subscriber to any digital music service, even though he does have satellite radio. He owns shares in Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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