Must-know: Why the shorts had Pandora wrong (Part 6 of 6)
Apple’s threat looms
While Pandora has certainly defended the initial onslaught from competition described in Part 4 of this series, investors shouldn’t discount the threat from Apple’s iRadio. Pandora is a member of the Global X Social Media Index ETF (SOCL), which seeks to provide exposure to an index of social media stocks.
The Internet Explorer experience
To illustrate the scale of the threat from Apple, consider the case of Microsoft’s Internet Explorer. During the late 1990s, Microsoft began to bundle Internet Explorer into its Windows operating system at no extra charge. Because most computers ran with Windows, Explorer rapidly took share, eventually reaching a 90% market share by some estimates, despite the fact that it was widely regarded as inferior. The explanation for this outcome is that Microsoft was “closer” to its customers and could leverage the installed base of Windows PCs to market its own Internet browser—users would have to take extra steps to download a competing browser.
The Microsoft Internet Explorer example eventually resulted in an anti-trust lawsuit that failed to convict the company. However, lessons may be drawn for Apple’s iRadio. Much like Windows, the popularity and large installed base of iPhones and iPads allow Apple to be closer to its customers and place the company in an advantageous position to market its own software to them. In this case, iRadio now comes pre-installed in iDevices, so users must take an extra step to download Pandora. Google Play Music is equally well positioned with its own installed base of Android phones. As the chart above shows, Apple has an installed base of over 88 million iPhones and iPads in the U.S. and Google has over 117 million Android devices, providing an enormous, locked-in audience for marketing a streaming music service. Only time will tell whether this advantage enables Apple and Google to win significant share.
Investors can’t discount the threat of competition from Apple
Although the threat of Apple—and Google—can’t be discounted, noticeable losses for Pandora may still fail to materialize. Consider the recent example of the new Apple Maps app that was initially bundled with the launch of the iPhone 5. The well-documented failures of the app led to a massive spike in downloads of the Google Maps app. Apple CEO Tim Cook even urged customers to consider third-party apps, saying, “While we’re improving Maps, you can try alternatives by downloading map apps from the App Store like Bing, MapQuest and Waze, or use Google or Nokia maps.”
The lessons to draw from these examples is that companies that are able to bundle their software together with an underlying platform like iOS, Android, or Windows will certainly be in an advantageous position. However, if the user experience isn’t up to par, consumers will quickly adopt alternatives, as the ease of switching has grown significantly. Because Pandora still manages to maintain a best-in-class user experience, it’s much less likely to lose material share.
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