Google's Latest Acquisition Hurts Pandora

Pandora is already under pressure due to increasing competition in the streaming space, and Google will make things worse.

Jul 10, 2014 at 2:00PM

There seems to be no respite for Internet radio company Pandora Media (NYSE:P). If Apple's moves into radio with its iTunes Radio service weren't enough, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is now beefing up its music streaming service with the acquisition of Songza.

Google's challenge
Pandora relies on algorithms to deliver music to listeners based on their listening pattern, but Songza uses a different technology -- human curation. As reported by TechCrunch, "Songza uses information about the user and context to determine the best playlists for you at any given time, all of which are curated by music experts (DJs, Rolling Stone writers, etc.)."

As a result, listeners will get a more customized experience, as Songza relies on human curation to deliver music, rather than an algorithm. TechCrunch goes on to reveal that Songza has a strong data bank that can deliver music based on the time of day, location, weather, and user activity.

Google will be using Songza's expertise in Google Play Music and YouTube. Presently, Songza has around 5.5 million active users, which is minuscule compared to Pandora's 75.3 million. However, with a market share of 52% in the U.S., Google's Android platform has a broad reach. Thus, it might not take much time for Songza to increase its active user base and become a potent challenger to Pandora under Google's banner.

Pandora's moves
By now, Pandora has seen threats to its business from several quarters, and Google is the latest to join the line-up. To counter the threats, Pandora is currently focusing on increasing user engagement, pushing up listening hours, and improving monetization. The company reports decent growth in key metrics. For example, in the first quarter, the number of active users increased 8% year over year to 75.3 million, while listener hours increased at a faster rate of 12% from the prior year period.

Pandora witnessed more than 25 million active listeners every weekday in March, and also had more than 26 million daily unique listeners every Friday of that month for the first time in any month in its history. These listeners are using Pandora for record lengths of time, consuming an average of 21.9 hours per active user for the month of March.

To sustain its growth, Pandora is incorporating new features such as alarm clock functionality, a sleep timer, and station recommendations. These features are already yielding results. For instance, people using its alarm clock functionality on Android are listening to Pandora 30% more days per week and 3% more hours each day than they listened previously.

Further, Pandora is trying to reach more listeners by providing its service in vehicles and consumer electronic devices. For example, Pandora is now available in several best-selling passenger vehicles. The company has more than 5 million unique active users through its native automotive integration. Driven by such moves, Pandora's market share has expanded. Its share of total U.S. radio listening increased from 8.1% a year ago to 9.1% at the end of March. 

Additionally, management has made some changes in the Pandora One program to improve monetization. This includes a slight increase in price for new subscribers, who will have to pay $4.99 per month to use its service. However, Songza is even cheaper, as its weekly subscription service costs $0.99 and contains no ads.

The bottom line
In such a scenario, it becomes necessary for Pandora to continue attracting users to its platform. This is why the company will be pushing up its marketing spend, a move which will hurt its profit in the short term. The company's marketing expenses in the first quarter increased a whopping 63% year over year, while content costs increased 26%. This was before Google announced its move to strengthen its streaming business, but since Google has entered the fray, it might become even more difficult for Pandora to become profitable on a GAAP basis.

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

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