Can Pandora Fend off iTunes Radio?

Six months ago, Apple (NASDAQ: AAPL  ) busted into the radio streaming space bent on dominating the segment just as it has digital music downloads. iTunes Radio has already skyrocketed ahead of Google Play All Access and Spotify and is nipping at the heels of iHeartRadio. Pandora (NYSE: P  ) is the leading radio streaming service in the U.S., but it needs to continue increasing active users and monthly listening hours to keep iTunes at bay.

iTunes turns up the volume
According to the latest data published by Edison Research, first reported by Fortune, iTunes as of February was just two spots behind Pandora in the U.S. market.

A brief look at the percentage of listeners who tuned in last month shows exactly where Pandora stands against the competition.


Source: Edison Research. .

iTunes Radio is making some serious gains, but there's no denying Pandora still has a strong user base. From January 2011 to December 2013, Pandora's active monthly users increased from about 30 million to 76 million. Acquiring that number of active users is no easy feat, and makes Pandora very difficult for Apple to topple.

But investors should consider that last month Pandora's listening hours increased by just 9.4% year over year, its slowest streaming hours growth to date.

That's an important factor because the majority of Pandora's revenue comes from advertising, and the company could find it harder to sell ads if listening hours aren't growing fast enough. Pandora CEO Brian McAndrews has said the slowdown was partially due to the previous streaming limitations the company imposed on accounts, which it has already removed.

Pandora is no longer breaking out monthly listening hours, and instead will report numbers each quarter. This means investors will have to wait until June to find out how listening growth has changed. That's not ideal, considering that iTunes is making headway against all the other streaming options.

Foolish takeaway
With its large active user base Pandora is still the dominant force in the U.S. streaming space. But losing any substantial portion of listeners to iTunes Radio could seriously hurt the company's advertising revenue potential.

While this article has primarily focused on U.S. metrics, it's important to note that Pandora has users in Australia and New Zealand, while iTunes Radio is presently only available in the United States. Once iTunes enters new markets, it is possible that advertising revenue could expand with it. Again, not ideal for Pandora.

Apple has a long history of entering new markets and devastating the competition. iTunes Radio is preloaded on millions of iOS devices and ties right into the millions of established iTunes accounts -- a huge advantage for Apple.

Pandora needs to keep growing its user base and monthly active listeners in order to keep revenue streams flowing. I'll be interested to see the company's active listener numbers and streaming hours in the next quarterly filing, to see if it loses anything to iTunes Radio. Pandora investors are obviously happy with the company, considering that the stock is up 34% year to date and up more than 161% over the past 12 months. Last month, the company posted its most profitable quarter since its 2011 IPO, but some of Pandora's guidance spooked investors temporarily. While there might not be any immediate danger to the company, Pandora investors shouldn't be naive regarding Apple's strong and growing radio streaming presence.

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