The Exchange

Apple’s iTunes Radio Hasn’t killed Pandora — Yet

Shares of Pandora Media (P) took off in a massive relief rally on Wednesday, jumping 7%, after the leading online radio service showed it hadn’t been "killed" by Apple’s iTunes radio — yet.

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Pandora app

But the rally, sparked by an announcement of September listener growth and a bullish note from J.P. Morgan, could be rather premature.

In its Wednesday release, Pandora said it had 72.7 million active listeners in September, up from 58.3 million a year ago. And total hours listened hit 1.36 billion from 1.15 billion last year. Pandora shares hit $27.39 on the day, close to an all-time high of $27.50 reached in September.

But Pandora’s year-over-year growth masked a more troubling trend. Despite removing a 40-hour cap on free mobile listening, Pandora’s total hours grew less than 1% from August and remain down 9% from March, when the cap was removed. Active listener growth slowed to 0.8% from 1.3% in August. And that's before iTunes Radio was available for a full month.

The notion of one technology product or company "killing" another is among the most over-used tropes on the Internet. However, while Pandora's not going to disappear overnight, its stock trades at an ultra-expensive valuation based on the prospects for rapid growth in revenue and profits. Even a modest hit from iTunes Radio could derail the rally even if Pandora retains most of its user base.

Competition from Apple

Apple (AAPL) released its copycat iTunes Radio app as part of its iOS 7 mobile software upgrade on September 18, and started selling two new iPhone models with the app on September 27. The company reported that 200 million Apple device owners had installed the software in the opening two weeks and 11 million people had sampled iTunes Radio. That prompted a one-day, 10% sell-off in Pandora, which has otherwise been extremely strong this year on increasing ad rates and mobile usage.

Bulls such as J.P. Morgan analyst Doug Anmuth said the listener stats for September showed a lack of competition from Apple. Anmuth rates Pandora as “overweight” and his best pick among small and midcap stocks.

“We continue to believe Apple’s product is limited in distribution across smartphones (iOS only, no Android) and does not provide a compelling reason for users to switch from Pandora,” he wrote.

But many iPhone and iPad owners have discovered otherwise and taken to Twitter to announce their disloyalty to Pandora. Several noted that Pandora’s song library contains only 1 million songs versus some 27 million for Apple. And since many Apple owners already pay for the company's iMatch cloud music service, iTunes Radio appears free of advertising.

Last week Pandora founder Tim Westergren conceded that Apple’s entry into the market would have a “modest” impact on his company.

That said, some users have complained about glitches with iTunes radio in the early going. Complaints include crashes, excessive song repeats and difficulties using virtual assistant Siri to control the app.

Any drop in listening hours could reduce the amount of revenue Pandora collects from advertisements. But this could be overcome if Pandora is able to charge higher rates or attract more listeners in other ways. Along with lifting the free mobile listening hours cap, the company recently beefed up its software app for iPad users.

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.

It's impossible to draw solid conclusions from a few weeks of competition, but that hasn't stopped Pandora investors. Maybe they should hang back for a few more months of data.

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