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There's a new online darling in the music scene.
Songza, a free music program that offers smartphone users unlimited streaming without any audio commercials, has shot to the top of the music app charts. You could say it's No. 1 with a bullet, and that bullet is aiming right at Pandora Media (NYSE: P ) .
Barclays Capital had some bearish thoughts last week on Pandora in light of Songza's quick path to stardom and the potentially game-changing ways of Amazon.com's (Nasdaq: AMZN ) new Cloud Player for iPhone.
Barclays Capital analyst Anthony DiClemente thinks the value proposition of Songza's curated playlists without audio ad interruptions and the ability to play exact tracks through Amazon's Cloud Player will make this a very competitive market for Pandora.
The developments aren't changing DiClemente's rating on Pandora. It retains its bearish "underweight" rating and its $9 price target.
Pandora paved the way
Pandora has encouraged more than two dozen automakers to make it easier for smartphone owners to stream their devices through their car stereo systems, but now it seems as if the competition for eardrums is intensifying.
That's bad news directly for Pandora, but it may also weigh on both Sirius XM Radio (Nasdaq: SIRI ) and terrestrial radio.
Pandora's clearly a pretty big deal these days. It's serving up more than a billion hours of monthly streams. The number of users has surged 52% over the past year to 51.9 million active listeners. Sirius XM is growing substantially slower, but it is, in fact, still growing. Sirius XM's subscriber count has climbed sequentially for nearly three years.
However, with Songza and Amazon's Cloud Player both competing for attention and educating drivers as they either buy new Bluetooth-enabled cars or join the growing population of smartphone owners, there has to be some form of a shakeout.
We're not necessarily driving more, so consumption may be divided by the greater number of worthy audio-entertainment providers.
The model is mad
Can Songza keep its promise?
It's easy to see why Songza's so popular. Users can easily ignore display ads that pop up while songs play. In a car setting, ignoring the ads is practically a safety issue. Can a free model survive where the ads don't get noticed?
Mobile advertising is a booming market. Millennial Media (NYSE: MM ) , the largest platform-agnostic provider of mobile display advertising, saw its fiscal first quarter revenue soar 53% last month. Millennial Media serves up ads for Pandora as well as for many of the more popular online games, including Angry Birds and Words With Friends.
Whether it's Millennial Media or some other company serving up the ads on Songza plays, it won't take long before the sponsors there realize that their ads aren't getting noticed.
If the advertisers don't complain, maybe the major labels will.
Pandora and Sirius pay a percentage of their revenue to the record labels in the form of music royalties, and the amounts aren't insignificant. Don't expect the prerecorded-music industry to stand still if weak royalty revenue from Songza is eating into the heartier payments from Pandora and Sirius.
Sirius XM is naturally better insulated than Pandora when it comes to streaming upstarts as competitive threats. The consistent coast-to-coast coverage and proprietary content are the real differentiators here. However, even Pandora may be safe from the Songza threat if the disruptor to the disruptor is toiling away on a flawed model that isn't easy to monetize.
Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.
XM Satellite Radio was a Rule Breakers recommendation before the Sirius XM merger. It's now gone from the scorecard, but if you want to discover the newsletter service's next Rule-Breaking multibagger, a free report reveals all.