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

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.

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  • Report this Comment On June 05, 2014, at 7:09 PM, zukerman wrote:

    Pandora finds itself in a position where it needs a miracle just to continue instilling hope that their shares are worth taking a chance on. In the end it doesn't matter how many listening hours or active users, even the total share of the streaming you hold, if you can't make money beyond your expenses. Many have predicted their demise in the past and when it seemed that their fate was sealed, fresh buyers come in. M&A activity has been somewhat brisk recently, but these involve deals with both companies generating profits. Rumors have sprung up again about a possible suitor and seems unlikely that it will move past that.

  • Report this Comment On June 06, 2014, at 10:19 AM, BillFromNY wrote:

    If you want to see a completely different take on the future of Pandora, just click Rule Breakers above, if you have access) and read the article by David Meier, one of the recommenders of Pandora for RB. David says that, while Apple and Spotify are paid mostly through subscriptions, Pandora will be funded mostly by local advertising and that they are better at this than anyone else. The software algorithm that controls creation of user stations will provide Pandora with the best information to share with advertisers on the music that each listener might buy.

    I get that, but I would be very nervous about a competitor with $150 billion targeting Pandora. I've already read but can't verify that Apple is voluntarily paying higher royalties than it has to. Apple can certainly afford to pay higher royalties or other expenses than Pandora until Pandora has to cry Uncle and probably be acquired, as long as it doesn't conflict with the securities laws.

    Apple's new CarPlay auto dashboard interface for people with iPhones is another weapon of unknown effectiveness right now. From the half dozen reviews of CarPlay that I have read, Apple controls which iPhone applications installed on the iPhone plugged into CarPlay will be supported. Right now all reviews state that Spotify will be supported but I've not seen one indication that Pandora will receive the same treatment.

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