Nice, Pandora (P). A net addition of 700,000 new paying subscribers, with total paying subscribers up 114% year over year -- that's impressive! Or is it? When we bring Apple's (AAPL 0.52%) iTunes business into the picture, the story begins to look very different.
A lurking giant
What's the figure that's haunting Pandora? 575 million, which is the number of Apple's iTunes accounts linked to credit cards. With the recent announcement of iTunes Radio at this year's Worldwide Developers Conference, Pandora investors should take time to digest this number.
iTunes Radio. Source: Apple.
Pandora's 2.5 million paying customers are like breadcrumbs to Apple's 575 million. Plus, Apple gains new iTunes accounts in droves. In the last 12 months alone, Apple added about 175 million accounts -- quite a contrast from the paltry net increase of 700,000 paying subscribers for Pandora in its most recent quarter.
And in terms of revenue, Apple's iTunes, software, and services segment delivers some massive numbers:
Sources: Apple SEC filing, reclassified summary data. Amounts are based on the trailing 12 months. All dollar figures are in millions.
Pandora's $472 million revenue in the trailing 12 months looks like small beans when compared to Apple's iTunes, software, and services revenue. To add some context to the impressive size of this Apple segment, it commands more revenue than Facebook, Netflix, Sirius XM Radio, and Pandora combined.
Yes, this segment includes sales unrelated to music, like e-books, apps, and software, but all of these are sold in the Mac App store. And the Mac App store, of course, is part of the iTunes store. Apple guru Horace Dediu estimates that this business has a gross margin between 15% and 17%, with upside possible. By his calculations, the segment could have contributed as much as $2 billion in revenue in 2012, up from about $1.6 billion the year before.
Apple's too big to ignore
2.5 million versus 575 million. That difference is a chasm. Can Pandora survive the advent of Apple's new iTunes Radio?
