Apple Inc. (AAPL) Will Gut Pandora Media Inc (P) From the Inside Out

Deja vu
The whole situation is reminiscent of Apple’s controversial entry into the e-book market, challenging Amazon.com, Inc. (NASDAQ:AMZN). Book publishers absolutely loathed the wholesale model that allowed Amazon to sell books at $9.99, since they felt that reduced consumer perception of a book’s value down to unsustainable levels. Amazon.com, Inc. (NASDAQ:AMZN)’s dominant 90% market share gave them little choice but to begrudgingly play ball.

When Apple came along and offered publishers the ability to set their own prices with the agency model, they jumped at the opportunity and Amazon.com, Inc. (NASDAQ:AMZN) had no choice but to follow suit. The net result was that e-book prices rose across the board, which has in turn led to a massive antitrust lawsuit against Apple that’s still under way.

That case is different in many ways, but the underlying storyline is that Apple is offering content providers a far more attractive deal than they have with incumbents, giving them leverage to negotiate better deals at the expense of those incumbents, either strategically or financially.

In the e-book case, Amazon even temporarily pulled Macmillan’s titles at the height of the dispute because Macmillan threatened to delay availability of new releases. Ironically, the broader shift to the agency model has probably boosted Amazon’s results, since it no longer sells titles at a loss and now grabs a 30% cut of higher prices.

Record labels could potentially give Pandora a similar ultimatum: “Pay us more, or we go with Apple.” If Pandora gives in, it may never reach profitability. If it doesn’t, the dominant music service may soon find itself with a lot less content. Apple probably won’t kill Pandora’s actual service anytime soon, but it could easily kill its prospects of ever posting black ink.

The article Apple Will Gut Pandora From the Inside Out originally appeared on Fool.com and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, and Pandora Media (NYSE:P) and owns shares of Amazon.com and Apple.

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