Can Pandora Overcome Competitive Headwinds?

Pandora faces excruciating competition in the music streaming space from newer competitors that include Amazon, Apple, and Google.

Jul 8, 2014 at 7:00AM

Pandora (NYSE:P) seems to have held up very well in the Internet music streaming business. The company has been growing its active user base and revenue. However, the company has had a difficult time achieving profitability. The music streaming category is very competitive as users have a wide array of choices in music outlets. The recent expansion of three major tech companies into the space will make life much more difficult for Pandora.

Cutthroat competition
Pandora has done a great job in staying ahead of competitors in the online music business. However, in 2014, additional competitors continue to enter the space. Apple, Amazon (NASDAQ:AMZN), and Google (NASDAQ:GOOG)(NASDAQ:GOOGL) all came out with newer music streaming offerings and/or made acquisitions that are on the playing field of Pandora. 

The company has stood its ground so far as the category leader, but the extremely competitive space might significantly harm its future growth. Pandora's 77 million active listeners tuned in to Pandora for 1.73 billion hours in May 2014, which was a 28% year-over-year increase. The company even saw its revenue growth reaccelerate to 69%, and those are stellar fundamental metrics from the Internet radio leader. 

However, existing players that include Spotify and iHeart Radio are making strong progress across the board. Spotify announced in May 2014 that it has 10 million paying subscribers and in excess of 40 million active users in 56 markets. On a comparative basis, Pandora has around 3.5 million paying customers, so Spotify seems to be ahead of Pandora in terms of generating stable subscription revenue.

With a large customer base of 50 million users, iHeart Radio is also hot on Pandora's heels in the space. In addition, Google and Apple also have their own organic services in the forms of Music All-Access and iTunes Radio, respectively. Both companies recently bolstered their services with acquisitions in the space and that might make it harder for Pandora to grow in the future. 

Newer offerings in the field
Apple made a highly publicized acquisition in the form of Beats. Considering the number of Apple fans worldwide, Beats could see significant consumer adoption if Apple invests into or markets the music subscription service heavily. Apple's iTunes is a high-traffic platform with more than 800 million registered customers and their credit card info and Apple will likely market Beats Music to this installed fan base. 

Amazon also came out with a music streaming service called Prime Music for its Prime members. The Prime Music service from Amazon will feature more than 1 million songs in an ad-free environment and will compete with the likes of Pandora for Internet based consumers.

Google already had significant offerings in the Internet music category with YouTube and All-Access Music, and recently the company acquired Songza, which is a music streaming service like Pandora with 5.5 million active listeners. Songza customizes music according to the time of the day, mood of the user, and the situation, etc. Google made a great acquisition because the service could see a lot more customer adoption in the future with Google's backing. 

Google's Android could make Songza a native app when the company updates the OS, and that would make Songza available to more than 1 billion Android-based devices worldwide. And Songza is a very good music streaming service too! The competitive landscape is far more competitive now than it was a few years ago for Pandora. However, Pandora is available on major platforms like Android, BlackBerry, and iOS as well as DVD Players, Roku, etc. And that makes Pandora's listener traffic a lot more diverse than a desktop-only listening audience.

The bottom line
According to eMarketer, Pandora will have 1.7% share of the worldwide mobile ad space, a $31.5 billion market. The mobile ad market is growing but Pandora might find it difficult to grow in the space, which is heavily dominated by Google and Facebook. Pandora's second-quarter 2014 guidance implies a slowing revenue growth rate of 42% year over year. The company remains well-positioned in the space, but given the increased competition in the space Pandora might find it difficult to grow or achieve substantial profitability over the long run. 

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends, Apple, Facebook, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of, Apple, Facebook, Google (A shares), Google (C shares), 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.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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