Apple Is a Huge Threat to Pandora

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Turns out Apple (NASDAQ: AAPL) will use Siri to favor its upcoming iTunes Radio at the expense of Pandora’s (NYSE: P) competing service. Who would've guessed.

Shares of Pandora plummeted on Wednesday after BTIG analyst Rich Greenfield argued that iTunes Radio’s Siri integration should give Apple an advantage in the car. As I've been warning for weeks, iTunes Radio poses a major threat to Pandora’s business, one that its shareholders should not take lightly.

Greenfield’s video

Greenfield, who has a Sell rating on Pandora, posted a video demoing the features of Apple’s iTunes Radio. (It can be seen here -- everyone interested in the space should take the time to watch it.)

Greenfield notes that iTunes Radio has a number of advantages over Pandora, like a lack of pop up ads and, more crucially, integration with Siri.

With Apple’s digital assistant, users can start a radio station directly with their voice. They can even tell Siri that they like a particular song. “Image if you were driving just how easy this would be,” Greenfield says.

The automotive battlefield

That last point is crucial. Increasingly, the automobile is becoming the major battlefield among digital music providers, and it’s there that Pandora still has the edge.

Shares have rallied in the past as Pandora has touted deals with major automobile companies. Last month, Pandora shares surged after the company said its service was integrated in more than 100 new car models, and that 2.5 million people were using Pandora in their cars.

Pandora’s management has often attempted to characterize the company as being the Internet alternative to terrestrial radio -- that it competes more with local FM stations than with Spotify.

But Apple is pushing into the automobile industry as well. The Cupertino tech giant has partnered with a dozen automobile manufacturers to bring Siri into the car. Soon, owners of a number of different car models will be able to push a version of iOS to their cars’ dashboards -- and there’s growing evidence that Apple has much bigger things planned.

Pandora’s reliance on Apple

The biggest problem Pandora faces is that it’s reliant on a company that’s coming after its business: It’s very likely that a large number of Pandora’s listeners are doing so from an iPhone. Consider:

  1. Pandora’s business is overwhelming dependent on the US
  2. Last quarter, 79% of Pandora’s listener hours were generated with a mobile device
  3. The iPhone has over 40% of the US smartphone market
  4. People who own iPhones are much more likely to use them for apps

Thus, although Pandora doesn't give the exact statistics, it’s likely that at least a third, and possibly two-thirds, of Pandora’s listener hours come from an iPhone.

Moreover, although Pandora touts its in-car connectivity, where is that connectivity originating from? More often than not, it’s an iPhone. The car systems that integrate Pandora into the dashboard do so by connecting a user’s smartphone (often that smartphone is an iPhone).

Not a threat to SiriusXM

When Apple first unveiled iTunes Radio in June, it was widely misinterpreted as being more of a threat to Sirius XM (NASDAQ: SIRI) than to Pandora. The Motley Fool’s own Rick Munarriz noted as much, observing the share price reaction to Apple’s announcement.

Sirius XM may have problems in the very long-term -- as cars become more and more connected, Internet-based alternatives should give the service a run for it’s money. Yet, at this point, that day seems to be in the distant future. Anyone on a long road trip can testify to the limits of smartphone data coverage, not to mention data caps.

Moreover, the key difference between a service like Sirius XM and one like Pandora, is that Sirius XM has exclusive content -- only Sirius XM has Howard Stern, for example, as well as tons of sports and political talk.

For the most part, Pandora is all music -- and it doesn’t own any of it. Its competitors are free to stream that content, and there isn't anything Pandora can do.

Another streaming company, Netflix, ran into this problem a year or two ago, when companies like Amazon began offering nearly identical services. Netflix’s management responded by investing in original programming and exclusive content deals. Pandora has no such exclusivity to offer.

No barriers to entry, fierce competition, and unprofitability

I continue to be baffled by Pandora’s investors. Not only does its business have virtually no barriers to entry, the company isn’t even profitable. Last quarter, Pandora reported a loss of $0.16 per share.

Apple’s iTunes Radio is Pandora’s biggest threat to date. Given that a large percentage of Pandora’s listeners are likely doing so from an iPhone, Apple’s iOS-integrated solution could rob Pandora of many of its listeners. At the same time, Apple’s push to get iOS integrated into cars could limit Pandora’s automotive ambitions.

Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of 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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