Is iTunes Taking Over?

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

Apple (NASDAQ: AAPL) has been in the news a lot the past few days (big surprise, I know) with stories about its new $5 billion campus and other various reports. However, Apple is also looking to improve its iTunes services by signing deals with at least two different record labels. So, who are they, and what effect will it have?

iTunes has approximately 160 million active iTunes accounts, and it strives to get even bigger. CNET has reported that Apple is close to signing deals with both Warner Music Group and Universal Music Group to help integrate a rumored streaming music service.  Now, these deals are not done, and some reports show that talks have become stagnant because of Apple's low offer of royalties. However, keep in mind that iTunes would bring revenues that would not otherwise be available to Warner and Universal. It is also expected that unique features not offered by other music streaming services would be available if these companies do sign. 

Apple also needs to close on a deal with Sony Music Group (NYSE: SNE), but goals have been set for a summer launch. If Apple can close on these deals, its annual Worldwide Developers Conference would be the perfect platform to announce a new music streaming service. Dates for that conference have not been announced, but it normally takes place in June. So, who all would benefit from these potential signings? 

In 2012, iTunes generated just over $8 billion in revenues for Apple.  As a whole, Sony generated approximately $1.5 billion less than iTunes. Warner and Universal Music Groups are both less than that. Obviously, there is more opportunity for the smaller companies to team up with a giant like Apple who has $136 billion in available cash -- not to mention nearly $165 billion in revenues over the past TTM. 

Pandora (NYSE: P) is a company that could be adversely effected by these potential signings, depending on the success that they have. Pandora has been on quite a ride the past year. 2013's March numbers were elevated in several major categories when compared to the numbers from March of 2012. Pandora released these figures in the past few days. 

  • Listener hours for Pandora during the month of March 2013 were 1.49 billion, an increase of 40% from 1.07 billion during the same period last year.
  • Share of total U.S. radio listening for Pandora in March 2013 was 8.05%, an increase from 5.73% at the same time last year.
  • Active listeners were 69.5 million at the end of March 2013, an increase of 36% from 51.2 million during the same time period last year.

Not too shabby. It leads me to believe that iTunes is not taking over the industry, though it is trying to obtain a firmer hold on it.

For investors, there is no better bargain than Apple. As its stock continues to struggle, it becomes cheaper and cheaper. While Pandora has a negative FCF, and Sony shows a .65% FCF yield. Apple, on the other hand shows a very cheap buy with a FCF yield of 11.7%. Pandora's stock has increased 29% in the past year, while Sony and Apple's stocks have fallen approximately 17% and 33% respectively. 

The Foolish Bottom Line...

I don't know what will happen with these companies, but I would think that these potential signings would be of benefit to nearly everyone. Pandora has grown its users dramatically in the past year, and that will likely continue. However, if Apple and Sony/Universal/Warner do make deals, they would likely all benefit. Apple's iTunes and Pandora are two of the largest products that provide music to listeners, and they are both growing rapidly. 

Tyler Wofford has no position in any stocks mentioned. The Motley Fool recommends Apple. 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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