Pandora shares suffer on word of Apple's radio service

Faith Merino · July 10, 0009 · Short URL:

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

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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Pandora, the leading internet radio service, gives people music they love
anytime, anywhere, through a wide variety of connected devices: laptop and
desktop computers, smartphones, connected BluRay players, connected TVs,
etc. Personalized stations launch instantly with the input of a single “seed” –
a favorite artist, song or genre. The Music Genome Project®, a deeply
detailed, hand-built musical taxonomy, powers the personalization or
Pandora. Using this musicological “DNA” and constant listener feedback
Pandora crafts personalized stations from the more than 800,000 songs that
have been analyzed since the project began in January 2000.
More than 75 million people throughout the United States listen to
personalized radio stations for free on Pandora through their PCs, mobile
phones and devices such as the iPad, and connected in-house devices
ranging from TVs to set-top boxes to Blu-Ray players. Mobile technology has
been a significant factor in the growth and popularity of Pandora, starting
with the introduction of the Apple app store for the iPhone in the summer of
2008. Pandora instantly became one of the most top downloaded apps and
today, according to Nielsen, is one of the top five most popular apps across
all smartphone platforms.

Pandora is free, simple and, thanks to connectivity, available everywhere
consumers are – at the office, at home, in the car and all points in between.
In 2009 the Company announced that Pandora would be incorporated into
the dashboard in Ford cars via SYNC technology; GM has already followed in
announcing plans to integrate Pandora into its vehicles and Mercedes-Benz
introduced their Media Interface Plus device that works with the
free Pandora iPhone app to provide direct control of Pandora from in-dash
stereo controls. This was all great news for the millions of Pandora listeners
who had been plugging their smartphones into car dashboards to listen to
personalized stations while driving. More than 50 percent of radio listening
happens in the car, making it a crucial arena for Pandora.

Today tens of millions of people have a deeply personal connection with
Pandora based on the delight of personalized radio listening and discovery.
These highly engaged listeners reinforce the value Pandora provides to: 1)
musicians, who have found in Pandora a level playing field on which their
music has a greater chance of being played than ever before; 2) advertisers,
who benefit from the multi-platform reach of Pandora, as well as its best
practices in targeting consumers for specific campaigns; 3) the music
industry, which has found in Pandora a highly effective distribution channel;
and 4) automobile and consumer electronics device manufacturers, who have
noted that incorporating Pandora into their product makes it more valuable
to consumers.

Pandora continues to focus on its business in the United States. The radio
arena has never been hotter, thanks to technology that enables radio to be
personalized to the individual and more accessible than ever before. Right
now millions of people listen to Pandora in the United States and we hope
someday to bring Pandora to billions of people around the world.

• 2000 – Tim Westergren’s Music Genome Project begins.
• 2005 – Pandora launches on the web.
• 2008 – Pandora app becomes one of the most consistently downloaded
apps in the Apple store.
• 2009 – Ford announces Pandora will be incorporated into car
dashboard. Alpine and Pioneer begin selling aftermarket radios that
connect to consumers’ iPhones and puts the control and command of
Pandora into the car dashboard.
• 2010 – Pandora is present on more than 200 connected consumer
electronics devices ranging from smartphones to TVs to set-top boxes
to Blu-ray players and is able to stream visual, audio, and interactive
advertising to computers, smartphones, iPads, and in-home connected