Pandora's Future Looks Bleak

For Pandora (NYSE: P  ) investors, the past 12 months have been terrific -- shares of the Internet radio giant are up more than 200%. Pandora's business has grown, and the company has achieved some limited profitability. Most importantly, listener hours have increased, as Pandora's share of the radio market has expanded.

But despite Pandora's recent move to the upside, I remain convinced this a poor investment for long-term shareholders. The competition just keeps getting better, with Apple (NASDAQ: AAPL  ) , Spotify, and now Samsung (NASDAQOTH: SSNLF  ) moving in to challenge Pandora.

Spotify buys The Echo Nest
Earlier this week, Spotify purchased The Echo Nest, a company focused on music curation. Many of Spotify's competitors -- including Rdio and Beats Music -- use The Echo Nest's technology to help power their song recommendation services.

In the past, Pandora's management has downplayed the threat posed by Spotify. Tim Westergren, one of Pandora's founders, argued in 2012 that Spotify and Pandora were offering two distinct services.

"[Spotify's] principal product is on-demand listening," Westergren told a group of Stanford students (via gigaom). In contrast, he argued, Pandora was an Internet radio provider: Instead of offering songs on demand, Pandora delivered up a steady stream of music, helping listeners to discover new music and requiring minimal interaction.

That might have true back then -- arguably, it's still true today. But by purchasing The Echo Lab, Spotify is clearly coming after Pandora's market, and emerging as a far more competitive threat.

Apple flexes car integration
In contrast to Spotify, it's impossible to argue that Apple's iTunes Radio isn't a competitor -- it offers virtually identical functionality. One could say that the service it provides isn't as good as Pandora's, but it's clearly targeting the same listeners.

And it has one huge advantage over Pandora: It's deeply ingrained in Apple's iOS platform. Apple's new CarPlay initiative, for example, puts iTunes Radio into the dashboard of anyone who owns both an iPhone and a CarPlay-compatible automobile -- a small subset of Pandora's listeners today, but in coming quarters, CarPlay could pose a significant competitive threat.

CarPlay integrates with some third-party apps, including Spotify, but not Pandora. Apple has promised to bring more third-party apps to its platform in the coming months, but it would not surprise me if Pandora never makes the cut. Investors should note that, while Apple has steadily added more third-party apps to its Apple TV set-top box, it has never included iTunes competitors, like Amazon.com's Instant Video, Target,'s Ticket or Vudu.

Samsung follows Apple's lead
I've shown that, using market share numbers, one can deduce that the vast majority of Pandora's listeners are using an Apple-made device. Still, not all of them are -- owners of Android-powered smartphones and tablets couldn't use iTunes Radio even if they wanted to.

But on Friday, Android got its own iTunes Radio equivalent: Milk Music. Free for owners of Samsung Galaxy devices, Milk Music is an Internet radio service that, like iTunes Radio, offers a listening experience nearly indistinguishable from Pandora.

It seems likely that, going forward, Samsung will feature Milk Music prominently in its TouchWiz Android skin. That should be an issue for Pandora, given that Samsung sells the vast majority of Android devices -- last year, OpenSignal estimated that about half of all Android devices in existence were made by Samsung.

But it's more than just bundling the app that could give Samsung's Milk Music an advantage over Pandora -- unlike Pandora, Milk Music is ad-free. Samsung is likely using Milk Music to make its devices more appealing to owners of Apple's iPhone, but Pandora could be the win most exposed. Pandora's listeners, fed up with hearing ads every few songs, could switch over to Samsung's service.

Pandora's future remains uncertain
I've been bearish on Pandora since last June, and admittedly, I've been dead wrong -- but the fundamentals haven't changed. Pandora is a company that, for much of its history, hasn't been profitable, facing direct competition from companies that are both larger and better capitalized.

Spotify's move into music curation is concerning enough, but Apple and Samsung could be the biggest threats: As they own the devices most of Pandora's listeners use to access the service, they're uniquely positioned to squash Pandora.

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