Are Pandora Media Inc's Moves Futile Due to Competition From Apple Inc?

With Apple getting stronger in radio, will Pandora make a comeback?

Jun 5, 2014 at 10:00AM

There wasn't much good news for Internet radio company Pandora Media's (NYSE:P) investors when it reported its first-quarter results. Although Pandora's net loss narrowed from the year-ago period and the company outperformed expectations, a weak outlook and a sequential drop in active listeners sent the stock crashing. As competition from other streaming services such as Apple's (NASDAQ:AAPL) iTunes Radio and Spotify is increasing, a weak outlook was the last thing that Pandora investors would have wanted.

However, there were a few positive takeaways as well. Will Pandora be able to come out of this slump?

The positives
Pandora's advertising business jumped 45%, year over year, to $141 million in the first quarter. Its subscription revenue came in at $39.5 million, an increase of 94% from the prior-year period. Average active listeners grew 8%, year over year, to 75.3 million during the quarter, covering almost a quarter of the U.S population. In addition, listener hours jumped 12% from last year to 4.8 billion in the quarter.

Its overall revenue rose 69% over last year and the adjusted loss dropped to $0.13 a share from $0.18 per share last year. Pandora had a number of positives, but a weak outlook led to a big sell-off. Looking ahead, Pandora expects the number of active listeners to grow once again in the remaining quarters of the year. The company is undertaking a number of moves to get better in the future.

Trying to get better
Pandora is engaged in various strategic initiatives such as increasing user engagement and accelerating monetization that should drive its growth in the coming years. Also, it is focused on offering more features to users such as an alarm clock, sleep timer, and station recommendations. These moves are already helping the company's growth, as listeners using its alarm clock functionality on Android are listening to Pandora an average of 30% more days per week. 

In March, Pandora witnessed 25 million active listeners every weekday for the first time ever. Moreover, management says that these listeners are now using Pandora for record lengths of time, consuming an average of 21.9 hours per active user in March.

Pandora is also strengthening its marketing and sales teams to increase its penetration. It has been conducting various marketing events like the one at Discovery Den, where it showcased nearly 37 live acts over four days. It also hosted a series of live personalized concerts, designed to connect fans with artists. Pandora used its ability to determine the optimal artist for each city by analyzing the local music preferences to keep engagement levels high.

The Apple threat
However, one big threat for Pandora is Apple. Apple has made huge strides in radio with its iTunes Radio service. According to website The Information, Apple is planning to bring local programming and advertisements to iTunes Radio. Sources suggest that Apple might offer 42 National Public Radio stations across the U.S., along with ESPN radio.

In addition, Apple is also planning to add targeted local advertisements to iTunes Radio, which should help the company see an increase in advertising revenue. Apple is also in talks with broadcasters like Cumulus Media, which caters to 150 million listeners across 110 metro areas in the U.S. Looking at Apple's moves, Pandora might see a slowdown in its own advertising growth. 

Bottom line
There's no doubt that Pandora's metrics are improving impressively and it is adopting smart strategies to grow its business. However, the company is up against a giant in Apple. The slowdown in active listeners looks like a warning sign. Since Apple is getting ready to cover the U.S. with its iTunes Radio, there might be no respite for Pandora going forward.

Going beyond iTunes radio. This is Apple's next smart device (warning, it may shock you)
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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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