Image source: Pandora Media.

Pandora Media (NYSE:P) investors have had their share of ups and downs this year. The stock seems to move higher when buyout buzz builds, retreating when fundamentals start to slip or a competitive threat emerges. The stock slumped 10.4% last week, so you can probably guess what happened.

The big reason for last week's slide is (NASDAQ:AMZN) rolling out a new aggressively priced premium service. The world's leading online retailer debuted Amazon Music Unlimited on Wednesday. It's an on-demand service, similar to what has helped Spotify and Apple's (NASDAQ:AAPL) fast-growing Apple Music attract a combined 57 million paying subscribers. Amazon's new ad-free offering is priced at $9.99 a month, just like Spotify and Apple Music, but it's also available for just $7.99 a month to the tens of millions of Amazon Prime subscribers.

Pandora isn't a player in the on-demand market. Folks can't pick out the exact songs that they want to hear on Pandora, at least not yet. Pandora selects tracks tethered to a user's preferences, and it's consumed mostly as a free ad-supported platform. However, it did roll out Pandora Plus last month, an ad-free music discovery experience for $4.99 a month. It's a step up from its original Pandora One service -- offering an offline listening component and more skips of undesired tracks -- but it's not in the same league as Spotify, Apple Music, and now Amazon Music Limited.

Digital music's cutthroat ways

Pandora's usage growth had stalled. There were 78.1 million active listeners at the end of June, fewer than the 79.4 million it was entertaining a year earlier. The bright side is that active listeners are consuming more content. Listener hours are up 7% over the past year, and the average user is streaming more than 24 hours a month. 

However, with Apple Music and Spotify growing on the premium end -- attracting 17 million and 40 million paying subscribers, respectively -- it's clear that Pandora isn't toiling away in the digital music niche that's actually growing. That will change. Pandora has inked direct licensing deals with most of the important record labels, and it's widely expected to introduce an on-demand offering to take on Apple, Spotify, and now Amazon in the coming months. 

The arrival of Amazon Music Unlimited with the online retailer presumably subsidizing the platform for its growing base of Prime subscribers will make things that much harder for Pandora to gain a foothold in the on-demand market early next year. Amazon's rollout also makes it less likely that will see Pandora's waning audience resume growing anytime soon.

There is still hope for a turnaround, and the lower Pandora's stock gets, the more compelling it becomes to potential buyers. Pandora reportedly rebuffed a buyout offer at $15 a share earlier this summer, and with the stock now trading nearly 15% lower than that, we will probably see a new wave of takeout chatter if the shares continue to lose steam. That may provide a floor on the slide in the near term, but Pandora investors would probably feel a lot more comfortable if fundamentals would start to improve to the point where future gains would be more sustainable than speculative.   

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.