Apple’s Gain = Pandora’s Pain
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The entire world is one market place and there is only limited space for big multinational corporations to function. The moment one new player steps in to a business segment, another existing player of the segments gets pushed out. The same can be the situation for the online radio giant Pandora Media (NYSE: P). The recent buzz about Apple (NASDAQ: AAPL) entering the internet radio space by launching its competing service has already turned out to be harmful for Pandora as its shares slid as much as 17%.
Over the years Pandora has become a market leader in advertising-aided internet radio and ads account for 88% of its revenues. The company, which recently reported its fiscal 2013 second quarter earnings, is going through a rough patch as the bottom line continues to be in the red. Though the company reported a brilliant 51% surge in its top line, the final outcome was disappointing at a $0.03 loss per share.
The online radio giant is facing issues related to the increasing content acquisition cost, an inherent fault in its business model. And now, things might get worse if Apple steps in to this segment. In the words of Richard Tullo, an analyst with Albert Fried & Co., "The 800-pound gorilla is pounding his chest, and people are starting to get nervous.”
Richard is right in saying so. The iPhone maker is a huge name in the industry and people are very much aware of the pioneer position it took in legitimating the online music business through its iTunes. With the ability to leverage the success of other business lines to the internet radio line, Apple has an obvious advantage over Pandora. Moreover, Apple doesn’t also need to generate money from this service actually. The company can add this as just another feature that users will get to enjoy as they become a part of the iFamily.
The online radio space is already a very crowded low-margin business area and Apple can easily forego the nominal profit as it can comfortably offset song sales by relying on the strengths of iPods and iPhones. The Cupertino-based company also plans to serve ads to listeners through its iAd platform, which also provides ads for Pandora. These moves will also help Apple expand its music offerings and confront various peers offering various forms of unlimited music.
The only way Pandora can pull out its bottom line from the red to the green zone is by growing in terms of subscribers, listener hours and ads. But, with Apple in the scene, Pandora’s recovery might become very tough. Even Spotify announced a rival internet-radio service earlier this year.
Pandora is also dependent on Apple for its success. The internet-radio service of Pandora is offered through PCs, tablets and smartphones and for Apple products the company has a dedicated app, making Apple one of the largest platforms for Pandora’s service. Now, as the terms between these two players turn more competitive, if Apple wants it can make Pandora’s life a lot more difficult by closing its doors to the app.
Pandora is aware of the risks. In a recent regulatory filing, Pandora noted: "If known incumbents in the digital media space such as Amazon, Apple, Facebook or Google choose to offer competing services, they may devote greater resources than we have available." Though Pandora’s subscriber base went up a lot recently, a huge portion of the base (20 million) uses Apple products to access Pandora’s offering. So, after Apple launches its new service, even if 5 million to 15 million of the users migrate to Apple, Pandora will end up losing almost 10% to 30% of its subscribers, plus face extreme difficulties in attracting new subscribers.
Many may say that the move on Apple's part is not very crucial. But, the move is not totally insignificant also. Apple can either choose to continue to make Pandora available to the iUsers or create its own online radio station and thus enjoy the added advantage of lower dependence on outsiders. The iPhone maker actually has spotted an opportunity here. The company already has iTunes and now having a service like Pandora's only makes sense. iTunes could provide the service with a significant amount of data regarding a listener's preferences, allowing it to more precisely custom tailor the content it provides and thus add value.
The giant functions in an industry space that is highly competitive and dynamic and unless it keeps on adding value to its offerings, it will face a difficult time. Peers such as Microsoft, Nokia and Google are always in an attempt to dethrone Apple from its position as an innovation leader. Very soon the latest Lumia series from Nokia, powered by the Windows Phone 8 platform, will hit the streets and compete with Apple’s latest iPhone. So, with a move such as this, Apple will have more to offer to its loyal users and thus make owning an Apple device even more enjoyable.
If everything moves as planned, very soon Apple users will be making their own virtual “radio stations” and enjoy services that were available through offerings from Pandora, Spotify and Sony Music Unlimited among few others. But the only point of relief for Pandora is that Apple is still in discussion stage and the process of getting license from music companies could take months, lending Pandora some time to figure out its future strategies to combat with the 800-pound gorilla before it takes a sizable bite out of Pandora’s market share.
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