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As Apple Inc. and Spotify Prepare Their Next Moves, Is Pandora in Trouble Once Again?

By Andrew Tonner - May 10, 2015 at 7:10AM

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Competition is about to heat up even more in the red-hot streaming music market. Can Pandora keep up?

Source: Pandora.

The streaming-music market is absolutely on fire these days.

On the product side, a number of highly publicized services have launched or are widely expected to reach the market in the coming months. Two of the most widely discussed are Jay-Z's Tidal and Apple's (AAPL 2.45%) Beats-based on-demand service. On the financial side, Spotify just secured a fresh $400 million in financing to further its global expansion.

So given all this new product innovation and fresh investment, I'm concerned that one of the industry's longest-tenured players, Pandora Media (P), might be on the losing side of history. Let's see why.

Apple gets serious about curation 
Apple is widely expected to unveil an overhauled version of the on-demand music service it acquired as part of its $3 billion Beats buyout last year, potentially as soon as Apple's World Wide Developers Conference next month.

What's more, Apple appears to be poaching top music-industry talent left and right in an attempt to bolster its upcoming service's taste-making appeal. According to industry rag Music Business Worldwide, Apple has hired away at least five of the top DJs and producers from the BBC's hugely influential Radio 1 station.

This move should help bolster Beats' already formidable curation staff, which is headed by Nine Inch Nails frontman Trent Reznor. This talent-poaching should help Apple's streaming service better compete with Spotify and Pandora, both in terms of offering the kind of cutting-edge music needed to attract and retain listeners, and in helping to identify and attract emerging artists into its service. Score one for Apple streaming.

Spotify staffs up
Beyond Apple's talent siphoning, Spotify is also fast at work in furthering its attempts to take on Pandora's sonic supremacy. As has been well documented, Spotify's recent $400 million financing round should enable it to continue its relentless international expansion, which could give Spotify a huge future advantage over Pandora.

Perhaps many don't realize this, but Pandora operates in just three markets: the United States, Australia, and New Zealand. Pandora claims it wishes to continue to expand internationally, which it will need to do if it wants to meet its lofty growth expectations. Contrast that with Spotify, whose service already operates in 58 countries, with plans for ongoing expansion.

Spotify's recent cash influx will allow it to continue building its lead. As a result, it seems Pandora will face an increasingly uphill battle if, or when, it ever gets around to scaling its business around the world. If the main options for international streaming services include only the likes of Apple, Spotify, Google, or, Pandora and its investors lose by default.

Pandora out in the cold? 
I've been consistently critical of Pandora for the better part of two years now, to varying degrees, depending on its valuation at the time. However, even as its valuation has receded from the stratosphere in recent months, there's another key concern that Pandora investors should examine, especially as the competition improves: lack of on-demand playback.

A core asset that enables Pandora to create great stations is its much-touted Music Genome Project, a complex series of tagging and linking that enables Pandora to provide hours of related and relevant music to a station a listener creates. Although it's hard to say with total certainty, anecdotal evidence suggests that this helps Pandora's music selection produce more enjoyable radio stations versus the likes of Spotify and Apple.

However, with Spotify and Apple offering -- or soon to be offering, in Apple's case -- both radio stations and on-demand playback, I'm concerned that Pandora's online radio service will lose some of its luster. The fundamental question becomes whether Pandora's one killer feature is compelling enough to compete with the rising tide of dual-threat offerings.

Obviously, only time will tell, but I think the answer is far from a resounding yes. What's more, it might be an irrelevant point, because Pandora fundamentally needs to continue growing its user base to stand a chance of becoming sustainably profitable. Simply treading water doesn't appear to be an option for Pandora.

So as Pandora's core competition continues to dial up the heat on the streaming service, I find myself once again concerned about Pandora's current trajectory -- albeit for different reasons than in the past.

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