Even After Beats, Pandora's Not Scared of Apple Inc.

Credit where credit's due: Pandora (NYSE: P  ) has defended its music-streaming crown quite admirably in the face of serious competition. Even a heavyweight like Apple (NASDAQ: AAPL  ) -- a company that no incumbent likes to see step into the ring -- hasn't been able to make a major dent in Pandora's position.

In fact, Pandora has increased its market share of domestic radio listening in the months since iTunes Radio was launched. In October, the month after Apple's entry, Pandora was enjoying 8.06% market share, which rose to 9.28% in April. Of course, the most notable change since then is that Apple's acquisition of Beats was just made official last week.

At the Raymond James Internet/Software Crossover Conference last week, Pandora further outlined its confidence against the coming Apple/Beats assault.

A tale of two music streaming markets
First off, it's important to note the distinction that Pandora sees within the music-streaming market. There are on-demand models like iTunes Match and Spotify, among many others. Pandora estimates this to be just 20% of how people consume music, with curated radio (where Pandora dominates) being the other 80%. Pandora CFO Mike Herring views Beats as positioned within the on-demand market, in which case the acquisition won't necessarily strengthen Apple's ability to directly compete with Pandora:

The on-demand space ... Google, Spotify, and Apple are competing directly head to head and then a bunch of smaller players. It's not a space we compete in at all. The connected radio, the lean-back experience, the free ad-supported part of music listening, that's Pandora's domain. We still have a dominant market share and by far the best product.

That may be true right now, but Apple's ambitions appear to be broad-based. The Mac maker's on-demand product is iTunes Match, but iTunes Radio will very much compete directly with Pandora for the "lean-back experience."

Herring considers Dr. Dre and Jimmy Iovine as key rationalizations for Apple's big buy, which is also true, but he's forgetting that the curation technology behind Beats Music is also a big piece of the equation. Tim Cook and Eddy Cue both confirmed exactly that last week at Re/code's Code Conference. Here's Tim Cook speaking about Beats Music:

We get a subscription music service that we believe is the first subscription service that really got it right. They had the insight early on to know how important human curation is. That technology by itself wasn't enough -- that it was the marriage of the two that would really be great and produce a feeling in people that we want to produce.

Both Pandora and Beats Music use human curation. Pandora doesn't use computers to break down songs into the 450 attributes that it tracks. Instead, it has a curation team dedicated to adding the human element. A curation team is exactly what Apple is acquiring.

Surprisingly, curation is very clearly a big part of Beats Music's value proposition (in addition to the on-demand service), so it's peculiar that Herring is overlooking this threat. It's the first thing that greets you on Beats Music's site:

Source: BeatsMusic.com

Again, Pandora has held up rather nicely with its user metrics. The company has made incredible progress improving its monetization engine, in part by investing heavily in sales people to target local advertising. That's driven total revenue per thousand listener hours, or RPMs, dramatically higher over the past year as licensing costs per thousand listener hours has only increased modestly.

Metric

Q1 2013

Q1 2014

Total RPMs

$26.96

$40.51

Total LPMs

$20.10

$22.57

Source: 10-Q

Apple's threat will not be directly to Pandora's monetization, but all that progress can be undermined if Pandora's user metrics begin to suffer. Pandora still hopes to reach over 100 million users in the U.S., but can Apple derail those plans?

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