Why Google Will Buy Pandora To Beat Apple

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

If you are a current investor in internet radio giant Pandora (NYSE: P) and you are not in a state of perpetual worry, then you are not paying attention. It didn’t take long for Wall Street to start writing off Pandora when rumors began to surface that tech giant Apple (NASDAQ: AAPL) was planning to launch a rival service.

Investors began to immediately question how much time does Pandora have left? However, it’s foolish to think that Pandora is going anywhere. First, Pandora’s market position is too significant to try to replicate anywhere else. Secondly, I don’t envision a scenario where the company would simply vanish. Instead, the more appropriate question should be, to whom will Pandora belong?

Pandora’s Acquisition Value

I think Google (NASDAQ: GOOG) will be the perfect landing spot. But does Pandora have the value that Google needs? For as much criticism as Pandora has received from fans of rival services such as Spotify and Sirius XM (NASDAQ: SIRI), many continue to overlook the progress that the company has made in several key areas.

For instance, over the past several quarters, Pandora has more than doubled its quarterly revenue. Although the company is often loathed for its lack of profits, it doesn’t get the amount of credit it deserves for approaching break-even status – much sooner than the company had originally anticipated.

What’s more, Pandora’s listenership continues to grow at a record pace. A recent comScore report, which tracks traffic from mobile devices says Pandora is doing all of the right things and heading in the right direction. The comScore service also tracks online video, assess website demographics while taking into account the size of the audience. So it's hard to refute.

The report said that in September Pandora’s offerings ranked 23rd across all platforms and the company is still moving up the rankings. So although there are clear signs of improvement, there are also legitimate concerns about the company’s rising costs – particularly as it relates to royalty payments. However, this has been a concern for every music streaming company – even Sirius XM.

I'm also willing to consider that if it were that drastic of an issue to the extent where nobody could make a profit, I don’t think there would be so many new entrants into the market. Because aside from smaller names such as Last.fm and existing music service from Research in Motion, Microsoft (NASDAQ: MSFT) is also rumored to be positioning itself for a music platform of its own.

What this means is that each of these names see an opportunity that they can’t ignore. With regards to Google, I think the company would be able to leverage Pandora’s popularity as a way to grow its advertising revenue to help it compete effectively with Facebook. Acquiring Pandora would also be a preemptive defensive play to keep the company out of the hands of Apple or even Microsoft.

Also, let’s not forget, Google just recently signed a content sharing deal with Sirius XM. So for Google, it’s not as if this would be an entirely new strategy - interest is already there. Meanwhile, Pandora has every reason to worry. I just don’t see how it can compete with the distribution channels and spending capabilities that Apple and Microsoft have. The company is going to need help to survive.

Nonetheless, this is all based on assumptions that both Apple and Microsoft will be able to execute. But on the other hand, when has a recent Apple strategy failed? With Apple’s dominance in mobile devices and its advantage with iTunes, it’s hard to imagine another company better positioned to make this work. This is yet another piece of motivation for Google to step in and close the deal for Pandora.

Bottom Line

Although shares of Pandora have rebounded slightly from the 20% loss the shares absorbed when the Apple rumors first surfaced, you can still smell the fear among investors – it’s understandable. I am curious to see if the company addresses these threats when it announces fiscal Q3 results on Tuesday after market close.

The company is expected to post a revenue increase of 56%, while net income is expected to arrive at $0.01 per share. This would represent a 50% decline year-over-year. As disappointing as the earnings results may be, Pandora is growing more uncomfortable as to what the future might hold. Unfortunately its fate is no longer in its hands – it has Apple to fear and perhaps Google to thank.

rsaintvilus has a long position in Apple. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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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