Wall Street has long speculated that Apple (AAPL) and Google (GOOG) entries into music streaming would mean game over for Pandora Media (P), the fast-growing pioneer of Internet radio. Now that both tech titans are officially in – Apple announced iTunes Radio Monday; Google’s service launched last month – investors might want to take another look at Pandora. If this is all the competition the big boys can muster, Pandora may be just fine after all.
iTunes Radio hardly looks like the sort of Apple product that immediately sucks customers away from the competition. In fact, it looked more like the sort of un-innovative products Apple has been rolling out lately, like an iPad mini after Google and others produced similar tablets and smartphones. Investors expected more from the company that invented the iPod, and they have sold off the shares accordingly, both before and after the iTunes Radio announcement, as seen in a stock chart.
Pandora is such a new company, there isn't a lot of financial research to be done. More crucial is its competitive position.
Tech reviewers have already pegged iTunes Radio as a direct rip-off of Pandora. Both instruct you to create stations with their favorite music, and both mix in other music their algorithms determine you will like. They’re both ad and subscription supported.
The big downside to iTunes Radio is its limited platforms. Pandora runs on Android and Windows phones, Roku boxes, Apple devices and pre-installed apps on about 100 new car models. iTunes Radio, rolling out this fall, runs on Apple devices only. And while Apple dominates the media player world, it’s losing ground or still a sideline with a couple of key platforms music listeners like a lot, like smartphones and television. (How many people do you know using Apple TV?) The number of smartphones one can use for a Pandora station is growing faster than those one can use for iTunes radio.
Google’s streaming service, launched last month, now looks like an overblown threat too. Google Play Music All Access – how’s that for a snappy name? – offers a no-ad subscription similar to Pandora’s. Not much in the service touches Pandora’s mission of “redefining radio,” which involves in part generating ad revenue to support free listening.
Certainly, the unique perks of both Apple and Google services will take away customers that Pandora dearly wants, just as competitor Spotify does and Amazon.com (AMZN) likely will in the future. But neither of these big gun products provides that instantly fatal bullet Pandora short-sellers have long-anticipated.
In fact, both Google and Apple products here smell of the sort of sideline businesses these companies often enter because they’re supposed to, not because they have a keen interest in ruling a new market. Perhaps Apple has more skin in the game – it will use iTunes Radio to boost iTunes sales – but it wouldn’t be too surprising to see these services go the way of Apple’s Ping or Google Reader; killed but possibly resurrected in some other form later. Apple's move could be seen as defensive, trying to protect iTunes, its Apple’s second fastest growing business, from a market shift away from buying sonds.
Pandora is gaining ground in both traditional and Internet radio markets. Revenues are expected to rise some 48% this year, and most analysts predict profits by the end of the year. Its shares rose some 69% this year alone, as seen in a stock chart, even as rumors about this impending competition intensified.
Certainly, Pandora faces its own problems beyond competition. Copyright royalties are high, controversial (Pandora is fighting for regulatory changes on these fees), and unpredictable, and they have kept the company from earning a profit even as revenues soared. With shares trading at a forward enterprise value to revenue ratio above 4, Pandora is an aggressive growth investment for those willing to accept high risk.
P Forward EV / Revenues data by YCharts
But the big threat to Pandora seems less scary today than it did last week, after seeing Apple and Google take their best shots. Those directors at Pandora are probably sleeping a little better now.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.
