Why Pandora Shares Plummeted

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Pandora Media (NYSE: P  ) have fallen 11% today after news that a certain digital-music pioneer is making big moves in the streaming space.

So what: The bad news started coming in on Sunday when The Wall Street Journal reported on Apple's (NASDAQ: AAPL  ) licensing deal with Warner Music, which included some very generous ad-revenue sharing stipulations. Warner's 10% take off the top is more than double the 4% Pandora currently pays to the major labels, including Warner. Since this was coupled with news of Apple moving toward launching its own streaming music service (dubbed "iRadio," of course), it was a double whammy against Pandora's thus-far unsuccessful efforts to become profitable.

Now what: Apple doesn't need iRadio to be a profit-spinner -- it simply needs to be another lure for potential iPhone (and iPad and iPod) buyers. Apple can easily annihilate Pandora's path to profitability as it signs labels to deals that will likely become the "new normal" for streaming radio. As a free service lacking the premium content options offered on satellite radio, Pandora's only real competitive advantage is in the sheer bulk of its music library. No label or artist is going to want to give Pandora access for a 4% cut if they can get double that rate elsewhere.

Pandora has won millions of devotees among music fans, but few supporters on Wall Street. The online jukebox seems to be redefining the way we consume music, a transformation that's only likely to grow. But high royalty rates and competition from all corners threatens to silence the company. Can Pandora translate success with its listeners into a prosperous business model that will deliver for investors? Learn about the key opportunities and potential pitfalls facing the upstart radio streamer in The Motley Fool's premium research report. All you have to do is click here now to subscribe to this invaluable resource.

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