The Inherent Vulnerability Inside the Pandora Music Box

Jay is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

While investors are seemingly concerned about if and how Pandora (NYSE: P) can measure up to Apple’s (NASDAQ: AAPL) planned online radio service next year, they must also know that Pandora is already in an ongoing competition with privately-held Spotify, another leading provider of music streaming service. Unlike Pandora, a pioneer of Internet music radio, Spotify offers more comprehensive music streaming services that go beyond the basic radio form and include things like on-demand listening. Relying solely on radio streaming may have made Pandora increasingly vulnerable in the music-streaming market where competitors can offer a wider listening experience by taking advantage of their non-restricted licensing terms with individual records labels. Limited by its compulsory licensing agreements with music industry rights groups, which explicitly prohibit playing music on demand, Pandora may have to find other ways to supplement its bare-bone radio offering to keep listeners on the dial.

It seems that Apple will also take a different approach to its online music offering than what Pandora has set about doing. The Apple online radio probably won’t just passively play random lists of songs, but will likely allow listeners certain flexibility about what they can hear. Serious questions need to be raised then as to whether the radio model that Pandora has stuck to is actually viable in the long term or sufficient by itself, as listeners explore new ways of enjoying music. To be fair, compared to other radio music, even that offered by Sirius XM (NASDAQ: SIRI) through its seemingly countless, all-inclusive music stations, Pandora's radio streaming of music is a huge flow forward. Although Sirius XM listeners can choose among different music stations that are playing, with Pandora, listeners can create the one station that they'd like to play based on some individual preference. But for the most part, Pandora is still a one-way broadcasting of automatically selected songs.  

When looking for songs from a particular artist, listeners using Pandora’s play radio will actually be streaming songs mostly from other presumably similar artists, whereas those using Spotify will be able to listen on-demand to songs exclusively from the artist inquired. I doubt that few would hesitate to log onto Spotify where they get to play what they want to hear. A search feature that Spotify has is what allows users to browse through tracks and albums from individual artists based on user input. Listeners can then play any track or album from the search results at their own choosing. Furthermore, Spotify users can create their own playlists from songs on Spotify tracks and albums and save them for unlimited, individualized on-demand listening. So who needs to dial up the Pandora play radio anymore?

But one thing seems to still play into Pandora’s advantage. While Spotify requires the download of a music-playing software program when using a PC, Pandora delivers its music through the open Web browser. Initializing a program from a PC’s hardware does add a bit inconvenience, at least in the perception of users’ minds, while opening a Web page is instant and of storage-free. This may be one reason why Pandora still claims having the most registered users. Apple is also reported planning not to use a Web browser for its music-streaming service, but any potential downsides remain to be seen.

After all, the Web is accessible from anything and anywhere, while an application program stored on a hard disk is reachable only from the device that holds it, a potential concern for some people. Also, Spotify has a robust social media application embedded into its program, and as such, it requires users to register from an existing Facebook account. Maybe not all music lovers are Facebook devotees, and as a potential result, the active user counts also appear to be in favor of Pandora with about 47 million members, compared to Spotify’s 15 million.

But this kind of advantage that Pandora currently holds is peripheral at the best and may not last. Even though Pandora has become representative of the Internet music radio and is very easy to use, the fundamental issue is whether users will continue to embrace the radio-streaming format that can only randomly assemble songs. However, since radio streaming doesn’t require much input from the listener, it can provide a more hands-off listening experience and may be best suited in situations such as in-car music playing. But with Spotify, playing previously created and saved playlists also doesn’t requires anything more than pressing the play button. Equally alarming, Spotify also has a radio-playing function, allowing users to play randomly selected songs if they wish. It seems that Spotify has given its users all the reasons to stick around.

Given what Spotify is able to provide to its listeners, plus the similar direction Apple will be taking, one has to wonder if Pandora can continue to remain relevant in the music streaming market in a significant way. People may still use its service from time to time, but Pandora likely won’t be the go-to place for sophisticated music listeners. Unless additional services are added, having put itself in a vulnerable position in the ever-changing music-streaming market, Pandora might eventually slip into a niche-market player.

JJtheArdent has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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