Apple Gives Pandora a Helping Hand

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Bloomberg says that Pandora Media (NYSE: P  ) is about to get some serious new competition. Anonymous sources report that Apple (Nasdaq: AAPL  ) is knee-deep in negotiations with music labels, gearing up for a music-streaming service launch in early 2013.

Pandora investors are taking the report as a sign of impending doom. Shares fell as much as 10% overnight, though early morning prices settled down at a more reasonable 3% drop.

Either way, this isn't bad news for Pandora at all. In fact, it's just about the best thing that could happen to Pandora, because Apple's presence gives a whole new level of legitimacy to the streaming music market. That's why I just started a bullish CAPScall on Pandora. I'm getting a discount based on positive news?

Look, I get that Apple's presence looks scary. Cupertino is an established force in the music industry thanks to its phenomenal success with the iTunes music store. Take that long-standing expertise and industry connections, add in the deepest pockets you've ever seen on a pair of casual business slacks, and sound the evacuation alarms.

But that's not what happens when the big boys move in on a fledgling market like this newfangled streaming music idea. If Apple plans to thwart Pandora's growth plans, well, thwart away, big guy!

Let's go back to 2005. Netflix (Nasdaq: NFLX  ) was a toddler playing with DVD mailers in a grown-up marketplace. "How cute!" said Blockbuster and Wal-Mart (NYSE: WMT  ) as they moved in for the kill. The leading video rental chain and the world's largest retailer would surely crush tiny Netflix between them, like you'd smash a bug under your heel.

Nope. Instead, Netflix took the free publicity from these potentially murderous threats and turned it into a competitive advantage. "The big dudes want to do what we're doing, but we'll do it better!" A few years later, Wal-Mart had sold its customer list to Netflix and Blockbuster staged a fine production of Faulkner's As I Lay Dying.

That's just the most vivid example of a greater trend. Disruptive business models tend to go through a cycle of ridicule and disdain, followed by serious market responses, and in the end, the new idea moves into the mainstream.

I'm not saying that Apple will fail like Wal-Mart or Blockbuster did, but this move only increases Pandora's chances to survive and thrive. I'd imagine that Cupertino is negotiating lower royalty rates with the labels, for example, thus treading a new path for Pandora to follow.

So yeah, I'm suddenly bullish on Pandora -- thanks to Apple.

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Fool contributor Anders Bylund owns shares of Netflix, and has created a bull call spread on top of his shares. He holds no other position in any company mentioned. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of Netflix and Apple. Motley Fool newsletter services recommend Apple and Netflix. The Motley Fool has a disclosure policy.
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  • Report this Comment On October 28, 2012, at 4:22 PM, AndreWilliamson wrote:

    Hmm. I have some Pandora long, with calls sold short against it

    That said, Blockbuster isn't a very good analogy. The move to compete with Netflix was strategic nincompoopery of the highest order. Instead of kicking its own stores in the crotch, Blockbuster would have been better served trimming locations and overhead, improving customer service, and cashing out the cow. (It's also a bad example because Apple is a cash-rich, capable and successful behemoth, and it doesn't hurt itself by moving into streaming.)

    Not sure how good wal-mart is as an example, either. Were they ever a credible DVD-by-mail threat?

    I think the bigger issue here is, can Apple get better terms on streaming from the content owners? If they can, Pandora could be hurt. On the other hand, Apple is unlikely to play with Android, so that leaves plenty of space for Pandora and others.

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