Shares of Pandora Media Inc (NYSE:P) were obliterated on Monday, and for good reason. Reports indicated that Apple Inc. (NASDAQ:AAPL) is gearing up to unveil its long-rumored iRadio service at next week’s WWDC.
According to Bloomberg, the service will act as a Pandora clone, with deep iTunes integration. If that’s the case, it’s hard to envision Pandora’s long-term viability.
Apple’s iRadio said to be a Pandora clone
Various outlets, including The Wall Street Journal and The New York Times, independently reported that Apple Inc. (NASDAQ:AAPL)’s upcoming Internet radio service will be nearly identical to Pandora in terms of functionality.
That is, users will be able to stream songs for free directly through iTunes, based on particular artists or tracks. It will be ad supported, and won’t feature Spotify’s on demand streaming functionality.
If this is the case, it completely nullifies the defense offered by Pandora’s CEO Joe Kennedy. In recent years, Pandora’s list of competitors has slowly ballooned to include nearly a dozen alternative services.
Yet, Kennedy has been able to offer up a plausible argument: these aren’t competitors in a true sense. Services like Spotify and Rhapsody are about providing on demand music; Pandora is about the ultimate in Internet radio.
But with Apple entering the scene, that’s no longer the case. And Apple Inc. (NASDAQ:AAPL) isn’t just any competitor.
Pandora’s reliance on Apple’s customers
Pandora’s biggest audience continues to be on the mobile platform — tablets and smartphones. In the first quarter, 79% of total listener hours came from mobile devices. Given that Apple Inc. (NASDAQ:AAPL) owns about half the US smartphone market and a big chunk of the tablet market, a great deal of Pandora’s listeners are probably using an Apple iDevice.
And given that iTunes is a big part of iDevices, it’s likely that a great deal of Pandora listeners are also iTunes users.
So, to come full circle, why would someone on an Apple Inc. (NASDAQ:AAPL) device use Pandora when they can use a native application like iTunes for nearly identical functionality?
Unlike other forms of media, Internet music services are a zero-sum game. While a user might use different services with different functionality (say Spotify on their desktop, Pandora on mobile) there’s no reason to use more of one service with similar functionality. Someone with a Spotify account, for example, has no reason to also have a Google (NASDAQ:GOOG) All Access account. Likewise, an iRadio user would have seemingly no reason to also use Pandora.
In effect, a listener iRadio attracts is one listener that won’t use Pandora.
A bullish case for Pandora?
The Street’s Rocco Pendola has written a unique, albeit implausible, defense of Pandora in the face of an imminent Apple onslaught.
Pendola argues that if iRadio is successful in pulling listeners from Pandora, it will be a positive for the stock. To date, Pandora has struggled to turn a profit, largely because its massive base of listeners amounts to an equally massive stream of royalty payments.
If fewer people use the service, Pandora could finally see profitability, as its royalty obligations would fall.
While Pandora may find temporary profitability, it’s not a value play. It’s an unprofitable business that has been carried by its investors largely because they believe that — one day — the company will be able to realize its dream of being the center of radio.
If Pandora starts to see meaningful subscriber loss, the company will be crushed. It will finally validate Pandora’s bears, many of whom have long argued that the company was greatly exposed to rising competition.
An Android savior?
Of course, if Pandora’s business is no longer viable on iDevices, it could fall back on Google’s Android. That might not be so bad, given that Android is the most popular smartphone operating system in the US.
That said, there are still plenty of competitors on the Android platform. There’s the aforementioned Spotify and Rhapsody, Slacker Radio, and Rdio, not to mention the fact that more are coming — Dr. Dre is planning to launch his own service later this year.
Google’s own recently launched service is tightly integrated with the Android player, but requires a subscription. Those unwilling to pay the monthly fee aren’t going to abandon Pandora for it, but because it includes Pandora-like radio functionality, subscribers to it have no reason to go back to Pandora.
No hope for Pandora
To recap, Pandora is an unprofitable business, beset by numerous competitors. Increasingly, these competitors are owned and directly integrated into the mobile devices used to access Pandora.
Why would anyone view Pandora as a viable long-term investment? Granted, if Apple’s iRadio is not as advertised, or is delayed still longer, Pandora shares will likely see a short-term rally, in particular because it has a fairly high short interest (over 20%).
But in the long-run, the company’s future appears to be hopeless.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google.
The article Apple’s iRadio Will Crush Pandora originally appeared on Fool.com.
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