Last week, I wrote a piece entitled “Apple Inc. (NASDAQ:AAPL)’s iRadio Will Crush Pandora (NYSE:P).” My premise was fairly simple: if (as severalreputable media outlets had independently reported) Apple Inc. (NASDAQ:AAPL) was about to unveil a streaming Internet radio service, Pandora Media Inc (NYSE:P) was facing serious — potentially existential — challenges.
I wasn’t the only one who thought this — shares of Pandora Media Inc (NYSE:P) plunged Monday on the news. (In fact, over the last two years, whenever rumors of an upcoming iRadio have been floated, shares of Pandora have sold off.)
Yet, Pandora Media Inc (NYSE:P) apologists remain. In particular, some argue that Pandora’s Music Genome Project (MGP) is so unique and revolutionary that it sets the company apart.
The Music Genome Project
The basis of Pandora Media Inc (NYSE:P) as a company is its Music Genome Project — the unique technology the company employs to serve up customized playlists (radio) to the listener.
Pandora Media Inc (NYSE:P) takes a song, breaks it down into different attributes (genes), and then uses these attributes to create a complex system of categorization.
On top of that, the company is constantly collecting data on its listeners’ preferences — thumbs up, thumbs down, song skips — to better refine its system.
In turn, it might be argued that this technology and data gives Pandora a competitive edge — one that its rivals cannot surpass.
What’s the MGP worth?
No other Internet music company has the MGP — it’s unique, and definitely has some value.
But what is that value? Does it justify Pandora’s $2.5 billion market cap despite non-existent earnings?
Although it might not be precisely the same, Pandora’s competitors offer similar radio functionality. Spotify, Google Inc (NASDAQ:GOOG) Music All Access, Rhapsody, Rdio — virtually all of the Internet music services have some “radio” component, and they aren’t that different.
For example, creating a Nine Inch Nails radio station on Google Music All Access generates a playlist of songs from other, similar groups such as The Smashing Pumpkins and A Perfect Circle.
What happens when one creates a Nine Inch Nails radio station on Pandora? Songs from The Smashing Pumpkins and A Perfect Circle.
Is the MGP really so special that it sets Pandora apart from its numerous competitors? I doubt it. Although some might argue that Pandora’s system of song curation is superior to other services, I would argue that the typical consumer really can’t tell the difference — that in the end, all they want to do is listen to some music.
The iTunes Genius
Further, the notion that Pandora has some monopoly on music preference algorithms is absurd. Apple Inc. (NASDAQ:AAPL) has been a dominant player in the digital music business since the rise of the iTunes store a decade ago.
To date, Apple has sold over 25 billion songs on iTunes — a fair amount of data from which to piece together music preferences. Of course, it’s already done this, in the form of the iTunes Genius.
If you believe Bloomberg’s report, than Apple Inc. (NASDAQ:AAPL)’s iRadio will serve as a way to bolster its iTunes business. It will be intimately integrated with iTunes, allowing users to purchase the songs they hear over Apple’s radio.
In order to effectively accomplish this task, Apple Inc. (NASDAQ:AAPL)’s radio must be pretty good at gauging a user’s music preferences. After all, why would the user purchase music they don’t care for?
Will Apple destroy Pandora?
I have no advance knowledge of Apple’s plans for its WWDC. As I wrote in my original post, if iRadio is a no-show — or if it takes a radically different form from the one that’s been reported — Pandora’s shares should see a strong move higher, particularly because it has a short interest near 20%.
But, over the long-term, Apple has the resources to undermine much of Pandora’s business. After all, a great deal of Pandora’s users are listening to the service from an Apple device.
If one believes that the MGP is so great that it sets Pandora apart from its competitors, then investing in the company might not be a bad move. Given the short interest, there is a large block of the investing community that agrees with me. A block that should (in theory) be proven wrong over time.
As that happens, shorts will get squeezed, and the stock will continue to power higher.
But if you believe the uniqueness of the MGP is over-hyped — that the process of generating playlists just isn’t that complicated — then it’s hard to see Pandora’s long-term viability. When you get down to it, it’s an unprofitable company facing a new competitor seemingly every month.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.
The article Will Apple Cripple Pandora at the WWDC? originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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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