Shares of Pandora (NYSE: P ) are up better than 15% in the last month. Much of that gain has been fueled by an upgrade from Goldman Sachs, whose analysts declared that the threat from competitors has "diminished."
I have no idea where Goldman is getting that from. iTunes Radio, Apple's (NASDAQ: AAPL ) Pandora killer, has not even hit the market yet.
When it does -- likely next month -- Pandora's problems will begin to materialize.
Apple's iTunes Radio is a Pandora clone
Those who have played with iOS 7 have nearly all come away in agreement -- iTunes Radio is a Pandora clone. Like Pandora, it lets users listen to music for free, and it functions exactly the same -- listeners seed a station based on an artist or track, then like and skip songs. (Those who have not seen iTunes Radio in action can check out the demonstration from BTIG's Rich Greenfield.)
But more importantly, iTunes Radio is deeply integrated into iOS. For example, using Siri, an iPhone owner can start playing a station through iTunes Radio -- something Pandora can't do. Obviously, this would be especially helpful when driving a car. And given that a significant percentage of listening is done in the car, iTunes Radio's Siri integration cannot be understated.
Moreover, in the past, Pandora investors have cheered when the company announced that its service was being integrated into yet another new vehicle. But numerous cars already support iTunes playback, and Apple is even taking it a step further. With iOS 7, its new iOS in the Car feature beams Apple's operating system to the dashboard of various car models.
And it could steal at least half of Pandora's listeners
Given that it's already installed, integrated with a user's larger iTunes library, and works with Siri, I have to believe that the majority of people who own Apple idevices won't be using Pandora for very much longer.
And that could be devastating. Pandora doesn't provide a breakdown, but it's likely that at least half of its listeners, and probably a lot more, are using Apple devices. In the first quarter, 79% of Pandora's listener hours came from mobile devices. In the U.S., which is Pandora's dominant market, Apple continues to be the single biggest mobile player.
Although iOS' market share has dwindled as Google's (NASDAQ: GOOG ) Android has become more popular, most of Android's growth has come from overseas -- emerging markets that Pandora isn't involved in.
According to comScore, Apple had about 40% of smartphone subscribers in the U.S. in June. In terms of tablets, Apple's iPad had 45% of the tablet sales. So, just based on those numbers, somewhere around 40% of Pandora's mobile listeners (mobile listeners being the vast majority of its listeners) are on Apple devices.
But it's probably a lot more than that. iOS continues to lead Android in user engagement. Users of iOS devices download more apps and use them more often. Thus, while only Pandora might know the exact numbers, it wouldn't be unreasonable to assume that two-thirds of its mobile users are coming from Apple devices.
Two-thirds of 79% is 52% -- just over half. These users could all flee the service once iTunes Radio is rolled out.
Google is getting into music, too
But it isn't just Apple. For now, Android owners don't have an integrated alternative to Pandora, but that could change. This year, Google took an unprecedented step forward in the music arena. In May, it released Google Play All Access, a subscription-based music streaming service.
Fundamentally, Google Play All Access and Pandora are vastly different products. The former isn't free -- it requires a monthly subscription, and is far more comparable to Spotify than Pandora. But a subscriber to All Access isn't likely to use Pandora. All Access has the same built-in radio functionality as Pandora, and gives users the ability to play any song at any time should they want to.
Yet, while All Access isn't likely to dent Pandora's numbers by a meaningful amount, All Access isn't just another of Google's silly side projects. The company has said it intends to bring the app to iOS -- it clearly sees a need for the product as part of Google's larger online ecosystem.
Investing in Pandora
Pandora is a stock that continues to baffle me. Although the company offers a great service, it isn't profitable. For now, Pandora remains a growth story, dependent on adding new listeners and more revenue in the hopes that -- one day -- it could replace terrestrial radio.
The only problem is that the company has innumerable competitors, not the least of which is Apple. When the Cupertino giant releases iOS 7 next month, iTunes Radio will suddenly become embedded in the mobile devices of the majority of Pandora's listeners.
As iTunes Radio offers identical functionality and better integration, there's little reason for these listeners to stick with Pandora. Android offers some safety, but that might not always be the case. With Google Play All Access, the search giant clearly sees a need to get a toehold in the music space.
No doubt, Pandora's been a great short-term investment. But longer-term, the company appears deeply challenged.
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