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Pandora Feeling Pain as Apple Seeks to Take a Bite Out of Its Audience

The Exchange

The P stood for "plunge" for Pandora (P) stock on Friday as its shares sank 18% in early trade following reports that Apple (AAPL) is in the middle of licensing negotiations for a service that will rival the online radio company's. Pandora shares are trading at around $10 following the report in the Wall Street Journal.


According to the Journal, "Apple's outsize presence in online-music sales and massive installed base of MP3 players, smartphones, tablets and computers could make it a much more serious threat to Pandora than any of its current would-be rivals."

Pandora, which started as part of the Music Genome Project back in 2000 and went public in June of last year (priced at $16, it rose more than 8% on its first day of trade on the NYSE), currently owns the online streaming radio market, with about 54 million active users. The largely ad-supported service allows its users to create radio stations based on their favorite artists or tunes. So, for example, if you want to hear songs that are similar to the ubiquitous "Call Me Maybe," you can create a Carly Rae Jepsen station and groove to it all day long.  Pandora offers both free and premium services, along with an app available for smartphones and other consumer electronic devices.  A large percentage of its use now comes from mobile.

The Cool Factor

The service has perhaps lost some of the super-cool factor it had back in the early 2000s as other streaming services seek to cut into its market share, including Clear Channel's IHeartRadio and  somewhat-shiny-new Spotify, the Swedish-based company that had its U.S. debut last year. But even Spotify's users are, at this point, just a fraction of Pandora's, coming in at around 16 million for the free and premium services.

Because of the huge royalty costs associated with procuring music to stream online, Pandora has never actually recorded a profit. But it did get a big stock boost on August 30 when it reported earnings and an outlook that exceeded analysts expectations (even with a loss of $5.4 million); on that day, shares were up as much as 21%.

In the past 52 weeks, Pandora stock has traded in a range of $7.83 to $15.97. Before the pullback, it was up around 20% year to date. Its market cap sits at about $2.1 billion.

Apple --whose iTunes has dominated the music download arena since 2003 and who is the world's mega music retailer overall -- has until now stayed away from this Pandora-dominated area of the online tune universe. Now that the world leader in tech is looking to take a bite out of it, will Pandora's box be crushed -- or at least damaged? Today more than one report has used the words "Pandora" and "death" or "kill" together.  A Fortune article today points out that Apple, if it so desired, could buy 60 Pandoras -- but then, since Apple could provide the same exact service and perhaps do it better than Pandora does (and possibly with lower licensing fees through setting its own rates with record labels it already deals with), why would it want to buy an unprofitable business?

Not everyone is down on the stock, however. Fusion Analytics' Josh Brown appeared on CNBC today and said today's stock decline could be an overreaction. "These guys are growing on a lot of different metrics," he said. "Sales up 51 percent last quarter, three-year growth rate of 132 percent. And again, keep in mind, 20 percent of the float was short going into today, so I wouldn't be shocked to see some covering here."

So far Apple has been mum on this next move following the Journal's report; perhaps the topic will be hit on at the big event on Sept. 12, where the highly anticipated iPhone 5 is expected to debut. Apple shares are trading up close to 1% today at $679.

Another example of the mega power Apple can have on other company's stock comes today with Audience Inc. (ADNC). The mobile audio firm is down a whopping 68% in early trade after it announced that its voice-processing chip technology will not be used for the iPhone 5 (although it will continue to be used with the older products). A slew of analyst downgrades followed. Audience Inc., which debuted on the Nasdaq in May at $17 a share, is now trading at $6.00.