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Apple's Latest Move Could be Great for Pandora

By Sam Mattera – Feb 15, 2016 at 3:25PM

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The iPhone-maker shuts down ad-supported iTunes Radio.

Apple Music. Source: Apple

Apple (NASDAQ: AAPL) has exited the market for free, personalized streaming music.

Late last month, the iPhone-maker ended ad-supported iTunes Radio, bringing an end to a 28-month experiment that saw Apple wade into a market long dominated by Pandora (NYSE: P). iTunes Radio lives on, but only within the confines of Apple Music, the Cupertino tech giant's $10-per-month streaming subscription service.

The introduction of iTunes Radio back in the fall of 2013 was widely heralded as a troubling trend for Pandora shareholders. Now there's one less competitor to worry about.

Apple looks to its services
Apple gave little explanation when it announced the end of ad-supported iTunes Radio last month. It may have been fueled, at least in part, by a decision to scale back on iAd, the advertising platform that powered the service. Last month, Buzzfeed reported that the company was dismantling its advertising-sales business; Apple subsequently announced that it would discontinue the iAd App Network at the end of June.

But a broader change in strategy may have played an equally important role.

From its inception, it was clear that Apple's iTunes Radio was designed to fuel iTunes music purchases. Like Pandora, it gave listeners the ability to curate custom radio stations based on particular genres, artists, or tracks. But unlike Pandora, iTunes Radio fed directly into iTunes -- each song was displayed with a prominent link and a reminder that it could be purchased from Apple's store.

Streaming music services, most notably Spotify, were starting to show signs of eating into the market for digital downloads back in 2013, but rather than embrace the on-demand model, Apple launched iTunes Radio to defend its long-standing iTunes business. Last year, however, Apple abruptly changed course, diving head-first into the streaming subscription business with Apple Music.

Apple has subsequently managed to amass a base of some 11 million paying subscribers, with ambitions of adding many more. More generally, Apple seems increasingly interested in becoming a services business -- with iPhone growth falling to a standstill, Apple is hoping to cash in on a large and dedicated group of iOS device owners. On the company's earnings call last month, CEO Tim Cook emphasized the power of Apple's services (via Thomson Reuters):

Our installed base has been growing very fast and has recently reached a major milestone, crossing 1 billion active devices for the first time. This is an unbelievable asset for us. Because our installed base has grown quickly, we have also seen an acceleration in the growth of our services business, another large and important source of recurring revenues. Now that we have reached this milestone of 1 billion active devices, we thought this would be a great opportunity to share more information on what has become one of the largest service businesses in the world.

By tucking iTunes Radio behind the paywall of Apple Music, Apple may successfully encourage some listeners to subscribe. "With an Apple Music membership, you can access dozens of radio stations handcrafted by our team of music experts," Apple wrote in its email announcing the end of free iTunes Radio.

A bump in listeners?
Others, unwilling to pay, may turn back to Pandora -- still the leader in free streaming music. Although Apple was not particularly forthright with iTunes Radio's relative popularity, a survey from Edison Research conducted in early 2014 found that it was the third-most popular streaming music service among Americans. At the same time, its introduction appeared to coincide with a modest slowdown in the growth of Pandora's active listeners. 

Source: Pandora

Pandora has continued to grow its user base in recent years, but not at the same scale it had prior to iTunes Radio's introduction. Of course, the market for streaming music is complex, and it's difficult to pin Pandora's slow growth on iTunes Radio. Still, it's one less firm Pandora shareholders need to worry about.

Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple 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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