Apple and Samsung Make Pandora a Bad Bet

In just the last two months, Pandora Media (NYSE: P  ) shares have lost roughly one-third of their value. A change to its disclosures, an adjustment to its subscription policy, and a general loss of momentum have all culminated in shares plunging from the all-time high hit just a few weeks ago. At current levels, do Pandora shares offer an opportunity for value-seeking investors?

No, because the competitive landscape continues to intensify, with Samsung (NASDAQOTH: SSNLF  ) and Apple (NASDAQ: AAPL  ) aggressively moving in. The long-term effects of competing with these behemoths has not yet been factored into Pandora's earnings results.

iTunes Radio: It will only get better
Pandora appears to have survived Apple's onslaught. Despite Apple's decision to add iTunes Radio its operating system, Pandora has not lost a meaningful number of listeners since Apple introduced its own Internet radio service last year. This has led some to declare an early victory for Pandora, claiming that Apple's entrance into the Internet radio market has been successfully rebuked.

This is painfully short-sighted.

Apple's iTunes Radio may not have lived up to the company's lofty expectations right out of the gate, but the iPhone maker isn't giving up. Music remains central to Apple's corporate DNA -- the wave of rumors surrounding planned changes to iTunes suggests that Apple will not so easily cede control of the music market to streaming services like Pandora.

Apple is rumored to be planning a change to iOS that would break iTunes Radio out from the larger iTunes app. That would bring more visibility to Apple's Internet radio service, and could incline more iPhone and iPad owners to choose Apple's service over Pandora's. Given that Pandora depends on Apple's devices to reach many of its listeners, iTunes Radio remains an existential threat.

Then there's CarPlay, Apple's new connectivity service. Owners of CarPlay-equipped vehicles can essentially mirror their iPhone's screen on their car's dashboard, allowing them to access a number of apps, including iTunes Radio -- but not Pandora. CarPlay will take some time to catch on (perhaps years) but given the importance of the car as a venue for music consumption, iTunes Radio has a huge advantage over Pandora.

Samsung teams up with a competitor to undercut Pandora
But not all of Pandora's listeners own iPhones -- many of them have Samsung's high-end Galaxy devices. Notably, Samsung's phones can't access Apple's service, making Galaxy owners an ideal market for Pandora.

But Samsung, too, now has its own competing service -- Milk Music, a rebranded, Samsung-exclusive version of Slacker Radio, one of Pandora's longtime competitors. For the time being, Milk is free and lacks ads, making an ideal alternative to Pandora. Leaked slides suggest that Samsung will eventually include ads, and charge for an ad-free version, but the supposed price for the service ($3.99 per month) is $1 less than what Pandora charges. This is particularly notable in light of Pandora's decision to do away with its discounted annual subscription.

Owners of older Galaxy devices can use Milk, but they have to download it from the app store -- this is an obvious issue, as they may not know about it. But newer handsets, including the recently released Galaxy S5, come with the app pre-installed. As Samsung releases more and newer mobile devices, Milk Music should attract more attention and could become the preferred Internet radio app of Galaxy owners.

Pandora is a dangerous investment
I've been negative on Pandora for nearly a year, and until recently, I've been wrong. Still, even with Pandora's pullback, shares are up significantly (more than 70%) from a year ago.

But long-term investors should ignore the volatility and remain on the sidelines. This is a company that has lost money for most its history (including last quarter), and doesn't expect to make much of it in the near future. As competition intensifies, led by Apple and Samsung, Pandora shareholders should brace for further pain.

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  • Report this Comment On April 30, 2014, at 11:09 AM, adamlevy wrote:

    Nice article Sam,

    I think the point to be made here is that Pandora's business is relatively easy to get into. There's no way to get exclusive content. As a result, big companies with alternative revenue streams can invest heavily in a streaming music product and they represent instantly strong competition for Pandora.

    Pandora's biggest advantage is its head start, but the iTunes Radio launch indicated its active user base is not impenetrable.

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