Pandora shares suffer on word of Apple's radio service

Rumors that Apple is looking to launch an Internet radio service causes Pandora shares to fall 18%

Financial trends and news by Faith Merino
July 10, 0009
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Pandora’s weekend is not off to a good start.  The Wall Street Journal reported Thursday that sources have hinted that Apple is in negotiations with music labels to create a Pandora-like service of its own.  The streaming mobile radio service would work across Apple’s family of devices, but not on Android’s devices, according to the report.

Word that the evil Apple monster is coming has Pandora shareholders fleeing for their lives like frightened villagers. Pandora shares dropped a full 18% to $10.24, after closing Thursday at $12.57.  As of this writing, shares were at $10.41.  It’s pretty sad, too, since Pandora shares had just climbed out of a slump on word of higher than expected quarterly revenues.

“This news comes as a surprise to us, given the trouble that mobile-first services such as Pandora have had monetizing mobile usage, and the high percentage of revenues that must be paid back to record labels in the form of royalties,” said Citi analyst Mark Mahaney in a research note.  “Said another way, we didn’t expect Apple to find the ad-supported, radio streaming market to be interesting enough to warrant pursuit.”

WSJ’s sources say that it could be months before Apple finally has everything in place to launch such a service.  The deals have yet to be solidified, but sources say that the talks are serious.  Indeed, Apple has a lot to lose if Internet radio companies gain enough traction.  Since launching iTunes in 2003, Apple has become the dominant player in digital music.  But the growing momentum of other digital music startups like Pandora, Spotify, Songza, and iHeartRadio threaten to chip away at Apple’s stranglehold on the market.

Pandora represents the biggest threat if only because of its ubiquity.  It currently represents 75% of all Internet radio listening, and it has integration with some 650 devices, including Apple’s Mac and iOS devices.  That pervasive presence alone is most likely the reason why similar services put forward by digital music competitors haven’t made as much gain.

True: Pandora has its faults.  You can create a station, but after a few hours of listening, you’ve pretty much heard everything you’re going to hear—probably two or three times.  But you just can’t beat free.

Last week, Pandora’s Q2 earnings beat analysts’ expectations with $101.3 million in revenue, a 51% increase over the same quarter last year.  Wall Street consensus pegged Pandora’s revenue at $100.9 million.

Of the $101.3 million in revenue, $59 million came from mobile usage, and of that, $53.2 was from mobile advertising.  The remainder was from subscription.  Fully $89.4 million of Pandora’s total revenue came from advertising.

That said, Pandora’s content acquisition costs rose 79% compared with the same quarter last year.  Consequently, the company posted a loss of $5.4 million.

With 54.9 million active users, Pandora is leading the digital music movement.  A report from Nielsen last year revealed that Pandora is the most popular music-only app in the U.S., with 23% of iPhone owners and 24% of Android owners using it.  Another report from Nielsen found that Pandora was in the top seven Android apps, just behind Facebook, Gmail, and Google Maps. 


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