Can Pandora (P) survive in a business that they virtually created? If you had asked anyone in the United States about online music streaming 5 years ago, Pandora (P) was likely to be one of the few, if not the only name mentioned in the conversation. While they had a rough start, Pandora (P) found their niche and started to accumulate daily users to the tune of over 81 million active listeners and over 20 Billion listener hours by year end 2014. Pandora (P) has been consistently stealing listeners away from traditional radio with their offering of customized stations, which has allowed them to become the leader in the online music streaming business. With advertising revenue growing year over year to around $152 million in 2014, everything looks positive for the future of their business, except for one problem, the competition. And as seen in the past with email services, search engines, and social media websites; a strong first mover advantage in the online market doesn’t always guarantee success.
Spotify (SPTF) was the next startup to enter the streaming music space and the first major player to challenge Pandora (P)’s dominance in the market. Hoping to take advantage of the popularity of social media, Spotify (SPTF) offered some unique features, like creating and sharing playlists with other users and friends and integrating with other social media accounts. This has given Spotify (SPTF) has a strong position in the market with a noticeable 60 million active listeners. They have successfully carved out their own user base, and along with Pandora (P), have been mostly unscathed by the launch of other music streaming services, such as, iHeartRadio, Last.fm, Grooveshark, SoundCloud, and a handful of others. However, with the popularity in this segment growing, it has become more difficult for the tech giants to ignore. Companies are working on or are updating their own streaming services and are planning to release them in 2015. Some of these include: iTunes Radio, Google’s Play Music, Amazon’s Prime Music, and YouTube’s Music Key,
Amazon (AMZN), Apple (AAPL), and Google (GOOG) have all taken steps to enter into the streaming music space. With a consistent user base already developed, these companies hope to adopt music streaming features and capture users from their existing services. Amazon (AMZN), for example, hopes to accomplish this by adding music streaming capabilities to their already existing Amazon (AMZN) Prime service. They hope to eliminate the need for a 3rd party application and create more value within their Prime service. However, I feel this strategy is limited because users can not select only the music streaming service, and are forced to pay for the shopping, video streaming, and other features offered with the $99 Prime Membership. While this is great news for existing Amazon (AMZN) Prime members, this is significantly more expensive than other music streaming subscriptions. This will limit the amount of new users who will pay for a Prime membership solely for the music streaming service.
Apple (AAPL), in my opinion, is the best positioned company to take over the music streaming market. Since, the introduction of iPod and iTunes, Apple (AAPL) has dominated the digital music market. But, since the introduction of music streaming services, Apple (AAPL) has seen digital song and album sales steadily decline. They have announced their plans to fully revamp iTunes, combined with recently acquired Beats Music, into a competitive music streaming service. With their massive devoted user base and seemingly endless supply of resources, Apple (AAPL) is looking to be a dangerous competitor in this market. However, behind closed curtains, we can only guess what Apple (AAPL) will be releasing to the public later this year.
Google (GOOG) has also become more serious about the music streaming business, however, I see a different strategy coming from Google’s management team. Google (GOOG), as the provider of everything from cloud services to robotics, is looking at the music streaming business from a different angle with their Google (GOOG) Play Music service. Google (GOOG), unlike Apple (AAPL) and Amazon (AMZN), does not have the strong music user base like iTunes and doesn’t have a membership service like Amazon (AMZN) Prime, so how do they benefit from attacking this new market? In my opinion, it is not what Google (GOOG) gains by being in this market, it’s what they lose by not being in it. Similarly to Microsoft in their entry into the gaming console business with their original Xbox, it is about staying competitive in related markets. Just as Microsoft saw the similarity between the future of gaming consoles and PCs, Google (GOOG) sees a clear connection between music streaming and their current web-related services. By adding this service into their quiver, Google (GOOG) is keeping users on their website instead of users moving from Google (GOOG) to Pandora (P) or another service to stream music. Also, by offering free cloud music storage for up to 50,000 songs, they will attract plenty of free users, but I am skeptical of Google (GOOG) being able to turn these listeners into members of the paid streaming service.
What’s next for Pandora (P)? While they have a tough road ahead, Pandora (P) does have some significant advantages over their existing competitors and the tech giants who are looking to dominate the space. While the rest of the industry is trying to play catch up with Pandora (P) and offer a user-centric music streaming service, Pandora (P) has proven that they currently offer a valuable service for listeners, and now they are shifting their focus to create greater value for artists. By creating the Artist Management Platform, or AMP, Pandora (P) will utilize their unique “thumbs up, thumbs down” and location features to provide artists with valuable information about listeners. Artists will also be able to use this service to create custom advertisements and messages to create a stronger connection with their listeners. While Pandora (P) currently has some strong advantages and a strategy to help differentiate themselves over their competition, the question is will they be enough to fend off competitors like Amazon (AMZN), Apple (AAPL), Google (GOOG), YouTube, and smaller, niche companies? Simply looking at the stock price over the past year, it seems that investors have serious doubts at Pandora’s ability to maintain their leadership in the market.
This article is based on my opinion and may contain forward looking statements. I currently have no positions in any of these companies and do not plan to initiate a position within the next 72 hours.