Pandora Media Inc (NYSE:P) is buying a physical radio station, though not WKRP of sitcom fame. Can the Internet radio pioneer save itself by going back to the old way of doing things?
Opening the Box
Pandora Media Inc (NYSE:P) is probably the best known of the Internet “radio” stations, streaming personalized radio stations to its 200 million users. The company has a database of music that it has coded with markers that show how each song is interrelated. A customer puts in a song or artist that they like and then the database starts streaming music with similar markers.
The free version of Pandora Media Inc (NYSE:P) is supported by advertising. The music streamed to paid subscribers isn’t interrupted by ads. Although very similar to a regular radio station, it offers far more personalization. Pandora Media Inc (NYSE:P) offers both a desirable and technologically interesting service.
The Pressure is on
That said, there’s nothing special about streaming music, which is why me-too services have been popping up. Now, however, Pandora Media Inc (NYSE:P) faces a notable threat from Apple Inc. (NASDAQ:AAPL), which is launching iTunes Radio. Up until now, Internet radio stations largely had to be sought out, just like Pandora. With Apple Inc. (NASDAQ:AAPL) providing a native app for radio, many of Pandora’s customers are going to have an easy alternative already installed on their Apple devices.
For Apple, the allure is clear–it increases the company’s services and advertising revenue. That’s a more annuity-like stream of income and it shifts the company away from a reliance on bringing out hot new tech toys to support the top and bottom lines. Also it helps protect, and perhaps grow, the company’s online music sales since iTunes and iTunes Radio will be tightly connected.
Don’t look for iTunes Radio to change Apple Inc. (NASDAQ:AAPL)’s business when it finally gets launched later this year. However, it is an important step in the company’s transition from a fast growth to a more mature, and likely slower growth, entity. Still, with a solid top line, robust bottom line, and a share price still well off of its highs, Apple stock could be a good turnaround option. And the around 2.8% dividend yield and stock buyback plans pay investors to stick around.
Not Making Money
If Pandora Media Inc (NYSE:P) were profitable, the Apple threat would be less daunting. Although the company’s top line has grown each year, so too has the size of its loss. That’s not a sustainable trend. While iTunes Radio won’t put Pandora out of business, it certainly won’t help the money losing operation.
The purchase of KXMZ-FM in Rapid City South Dakota is an attempt to cut costs, or least keep them in check. Because Pandora is an online only service, it has to pay higher rates for the music it plays. That puts it at a competitive disadvantage to competitors who have both a physical presence and an online presence.
With the per song rate set to increase more than 25% over 2012 levels in 2015, stepping up now to limit the pain is a good call. This move will also allow the company to benefit from industry-wide contracts that it had been excluded from previously.
Sony’s Cut
Being part of the larger contract negotiations is important. Content has been increasingly in-demand as digital streaming of music and videos has become more common among customers. Sony Corporation (ADR) (NYSE:SNE), for example, was rumored to be the last holdout in Apple’s efforts to get iTunes Radio up and running.
Without a physical radio presence, Apple had to negotiate its music costs on a company by company basis. The content and electronics giant was said to have extracted a 10% of advertising revenue fee, well above the normal 4% rate. That rate applies to any ads around Sony Corporation (ADR) (NYSE:SNE)’s music and could be quite lucrative over the long-term.
This shows the value hidden in Sony Corporation (ADR) (NYSE:SNE), despite the company’s struggles on the electronics side of its business. Although Sony has bled red ink for eight straight quarters, the shares have turnaround potential for more aggressive investors. That’s true even though the shares have rebounded strongly off their lows on news of dissident hedge fund manager Daniel Loeb’s call for a company break up.
Watch and Listen, but don’t Buy
Pandora Media Inc (NYSE:P) is making a good strategic move by buying KXMZ. It isn’t enough, however, to take the company from losses to profits. Add in the device-based entrance of iTunes Radio, and Pandora has a lot on its plate right now. Investors would be best served sitting on the sidelines.
The article Lowering Costs With WKRP In Cincinnati? originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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