Pandora Media (NYSE:P) stock has been under considerable pressure lately, falling by almost 45% over the last year as investors grow disappointed with the company's financial performance. Adding to the concerns, Apple (NASDAQ:AAPL) recently announced the launch of its new music streaming service, Apple Music, on June 30. Will Apple Music kill Pandora Media?
Music to investors' ears
Times are changing rapidly in the music industry. When Apple introduced the iPod in 2001, the ad campaign said "1,000 songs in your pocket." But consumers don´t want to carry music in their pockets anymore. Why would you do that when streaming services offer a practically unlimited library of content available in the cloud via Internet or other connections?
According to the IFPI 2015 Digital Music Report, the music industry last year produced the same amount of revenue from digital channels as from physical product sales. But the main trend is quite clear: Digital is rapidly gaining ground versus physical, and streaming is major driver of that dynamic.
Total digital music revenue increased 6.9% in 2014, but permanent downloads declined by 8%. Most of the growth came from streaming, with subscription streaming revenue growing 39% and ad-supported streaming increasing 38.6%.
Young consumers and millennials are particularly inclined toward streaming in replacement of the old music ownership model. This is clearly a key demographic segment in the industry, so everything suggests the music streaming revolution is here to stay and grow.
Pandora vs. Spotify and Apple Music
The good news for Pandora shareholders is that the company is in the right place when it comes to the main industry trends. On the other hand, Pandora is far from alone in trying to profit from a changing industry landscape, and growing competition in music streaming is a major risk for the company.
As of the first quarter of 2015, Pandora had 79.2 million active listeners, and the company accounted for 10% of U.S. radio share, according to management. Pandora's business model is mostly based on free music streaming monetized via advertising, which produced 77% of total revenue in the last quarter. The company also offers a premium service allowing members to play music without ads for $5 a month, but this service has never gained much traction among listeners.
When looking at the online radio industry, Pandora has a leading 62% share of the market, followed by Spotify with 22% and iHeartRadio with 8%. The company has the first-mover advantage, and it has collected tons of valuable data regarding tastes and habits of its users via its Music Genome technologies and other statistical techniques. The company is clearly the top dog in advertising-based online radio.
Spotify is another leading player in the industry, but it has a different business model. Spotify reportedly has 75 million active users; the company's main strength is its ability to convert those users into paying subscribers -- more than 20 million subscribers are paying Spotify $9.99 monthly for the premium service.
Based on Apple's announcement, Apple Music looks like a more threatening competitor for Spotify than for Pandora. Apple Music will cost $9.99 per month, just like Spotify's premium service, and it will offer a similarly sized library, with approximately 30 million tracks.
Keep in mind that Apple launched its iTunes Radio service in September 2013; this service should theoretically compete head-to-head against Pandora, but it has not inflicted much damage on the online radio company.
Pandora is mostly targeted toward consumers who are not willing to pay for online music; this is a sizable piece of the market, and it will probably remain so in the future. Pandora CFO Mike Herring recently said he believes 80% of listeners in the U.S. are unwilling to pay for services such as Apple Music. This could be an exaggeration, and Herring is obviously an interested party in the discussion, but he probably has a valid point in saying many consumers will remain loyal to Pandora and its ad-supported business model.
Pandora is operating in a very dynamic environment, competition is on the rise, and the business remains unprofitable, so the stock should be considered a risky proposition. On the other hand, music streaming should provide enough room for multiple players with different business models to grow and thrive over the long term, and Pandora is the leading player in ad-supported radio. With this in mind, I see no reason to believe Apple Music will necessarily kill Pandora.