Dr. Dre and Trent Reznor are currently working on yet another streaming music service. The project, codenamed Daisy, promises Spotify-like on-demand music with Pandora Media Inc (NYSE:P)-like curation.
Daisy is due out sometime in 2013. With Google having just released its own service, and Apple Inc. (NASDAQ:AAPL) widely rumored to have one in the works, I continue to wonder why anyone would remain invested in Pandora.
Dr. Dre’s business acumen
Although it’s hard to criticize Dr. Dre’s music career, he might actually be a far better businessman than rapper. Beats Electronics/Beats by Dre has become a force to be reckoned with in consumer electronics; and though it isn’t publicly traded, it has definitely impacted some stocks.
Take Skullcandy Inc (NASDAQ:SKUL). The headphone-maker went public in the summer of 2011. Since then, shares have pretty much gone in one direction: down.
Since going public, Skullcandy Inc (NASDAQ:SKUL) shares have fallen over 70%, and might be even lower if it wasn’t for persistent acquisition rumors.
Beats by Dre might be part of the reason Skullcandy Inc (NASDAQ:SKUL)’s had such horrendous performance. On the last earnings call, Skullcandy’s founder called Dre a “brilliant guy” and that he had “nailed it” with his product. Still, he distanced his company from Dre’s by noting that Skullcandy’s offerings are often much cheaper. But with Dre keeping the high-end, high-margin market on lock down, it limits Skullcandy’s options.
There’s also Dre’s tie-in with Hewlett-Packard Company (NYSE:HPQ) and Chrysler. Since 2009, Hewlett-Packard Company (NYSE:HPQ) has been using the “Beats by Dre” labeling to differentiate its lineup of PCs and tablets; Chrysler has begun to do the same with its cars.
Clearly, Dre’s name can move products — Daisy will likely be no different.
Trent Reznor’s creative genius
Reznor’s band, Nine Inch Nails, has been one of the most successful music acts over the last two decades. But alongside Nine Inch Nails, Reznor has consistently branched out into other projects, such as video games and movie soundtracks.
He’s now serving as the Chief Creative Officer for Daisy. In an interview with The Guardian, he revealed his contribution to the product: a system of intelligent, human-guided curation to supplement machine algorithms.
This is where Daisy could represent the biggest threat to Pandora. The Internet-streaming radio giant prides itself on providing an excellent radio experience powered by its phenomenal music curating algorithms.
If Daisy can offer something equally as amazing, or even better, it could represent a significant competitive threat. The music industry might also be more supportive, as one can imagine the power such a system could offer to up-and-coming bands (“here are some new rappers Dr. Dre recommends”).
An Apple tie-in?
Various reports have indicated that Dre’s other partner on the project, Jimmy Iovine, sat down with Apple’s CEO Tim Cook back in March. Apple has long been rumored to be working on its own streaming music service, but Daisy integration might make sense.
After all, Apple has been willing to integrate other company’s services into its products in the past, notably Facebook Inc (NASDAQ:FB), Twitter and Yelp. Daisy integration, if exclusive, could be a big differentiator for the iPhone-maker.
I’ve written that I believe streaming music services pose a long-term threat to Apple’s business. iTunes functions as a way to keep people tied into Apple’s ecosystem — someone with a large iTunes library isn’t likely to leave.
But a subscriber to a streaming music service isn’t going to buy music from iTunes, and will therefore be more willing to migrate between devices. Consequently, Cook might’ve told Iovine to get lost — preferring to keep Apple’s music business in-house.
But if he didn’t, it would be a significant competitive advantage for Daisy. Pandora still has strong name recognition — perhaps the most of all streaming music services. An iOS integration would help Daisy catch up.
The case for Pandora
I’m not sure if it’s wise to short Pandora Media Inc (NYSE:P). Over the last few months, the company has rallied significantly, in part because short sellers have probably covered their positions.
But at the same time, the bull case for the company seems incredibly bleak. Pandora Media Inc (NYSE:P) isn’t making any money as is; what will the long-term, net effect of all these rival services be? It certainly won’t be positive.
Pandora Media Inc (NYSE:P)’s CEO would have you believe these services compete in a different market — that Pandora Media Inc (NYSE:P) is about free, curated radio and these alternative services are about paying for on demand music.
That’s true, to some extent, but Daisy is looking to close the gap in terms of curation. At the same time, someone shelling out monthly for a service isn’t going to listen to Pandora. So, for every consumer a service like Daisy captures, that’s one less listener Pandora can appeal to.
I simply fail to see a compelling reason to invest in Pandora Media Inc (NYSE:P). It’s a non-profitable business in a market that’s already highly competitive, and getting more competitive nearly every day. Daisy is just Pandora’s latest rival, though if Dre’s previous successes are any indication, it could end up being the best.
The article Two Superstar Musicians Are Working on Yet Another Pandora Competitor originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Skullcandy. Salvatore “Sam” 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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