The Exchange

Apple iTunes Radio Climbs Chart of Concerns for Pandora Investors

The Exchange

Investors are finally weighing the damage Apple may be inflicting on Pandora Media (P) and its popular online radio service.

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iTunes Radio

Apple (AAPL) said on Monday that 11 million people have already listened to its copycat service, which is included in the new iOS 7 operating system for iPhones and iPads. On Tuesday Pandora founder Tim Westergren conceded that Apple’s entry into the market would have a “modest” impact on his company, which has about 72 million monthly active listeners.

Pandora investors largely ignored the potential threat until this week. Shares of Pandora have climbed 167% so far this year, including 62% since Apple officially announced iTunes radio on June 10. The company also priced a secondary share offering last week, raising a war chest of nearly $400 million.

But after Apple released iOS 7 last week, huge numbers of Pandora fans started sampling the competition. They flocked to Twitter and posted about their disloyalty. Pandora shares lost 10% Monday, bouncing back less than 1% Tuesday.

Switchers will likely reduce Pandora’s 1.4 billion monthly listening hours by 60 million immediately with another 60 million or more hours at risk as more people install iOS 7, Stifel, Nicolaus & Co analyst Jordan Rohan estimated.

The drop could reduce the amount of revenue Pandora collects from advertisements. But such a loss could be overcome if Pandora is able to charge higher rates or attract more listeners in other ways. The company recently beefed up its software app for iPad users and lifted a 40-hour per month cap on free mobile listening. Both services let users listen free with advertising. Pandora offers advertising-free subscriptions for $36 a year. Apple cuts the ads for people who pay $25 a year for its iTunes Match service.

Westergren, speaking at a Goldman Sachs investor conference in New York, said about half of Pandora’s users who listen on an Apple-made device also listen on other devices including Android phones, smart television sets and Internet radios.

“It's really too early to tell what the adoption will be, what consumers will think of it,” he said. “We think its impact to be modest on Pandora.”

Employees at Pandora are increasingly concerned about the threat, one former employee said. Most other competing online music services, such as Spotify and Rdio, were seen as complementary since they focus more on user-selected songs, not radio-style playlists.

Apple’s offering, which draws from a much larger library of songs than Pandora, could be “very difficult to compete with,” the former employee said.

Pandora declined to release data about the impact of Apple’s service. The company will release its normal, monthly usage report in early October.

For the first time in six months, analysts on average have reduced their earnings estimates for Pandora, according to data from FactSet. The average estimate for profit next year increased from an average of 17 cents a share to 26 cents from February through the end of August. But so far this month, 13 analysts have cut their estimate and the average declined to 25 cents a share.

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