Why Apple Hasn’t Managed to Kill Pandora Yet

  • Share
  • Read Later
Victor J. Blue – Getty Images

Pandora remains the king of Internet radio for now. The online music service’s position atop the sector has been in question ever since Apple announced it was launching a direct competitor, but Pandora has fended off iTunes Radio fairly effectively since it debuted in September. The company posted record revenues in its most recent quarter of $180.4 million, beating analyst expectations. The net loss of $1.7 million was down from a $2.1 million profit a year ago, but considerably smaller than quarterly losses earlier in 2013. Pandora stock dipped just slightly to $29.11 in after hours trading.

It’s still tricky to ascertain exactly what impact iTunes Radio is having on Pandora. Though Apple’s service attracted 11 million unique users in its first five days on the market, its growth slowed afterward, and it attracted just 20 million users total through first month. Still, the service may have taken a small bite out of Pandora’s listenership, which declined for the first time this year in October, from 72.7 million to 70.9 million. However, total listener hours increased from 1.36 billion 1.47 billion in October, showing that Apple’s offering hasn’t yet affected Pandora’s bottom line.

(MORE: Here Comes iTunes Radio, Threatening to Shake Up Music Streaming)

Perhaps a greater worry than Apple is the fact that Pandora’s user growth is slowing in 2013. From October 2012 to September 2013, Pandora gained 11.7 million new active listeners, a 20 percent increase from 2012. But in the year prior the service gained 18.9 million new active listeners, a 47 percent increase. Total listener hours also dipped for the first time earlier this year, though Pandora quickly addressed the issue by removing the 40-hour monthly limit on mobile use in September.

With less runway available in terms of user base growth, the company is trying to monetize its current users more effectively. Mobile revenue, a quickly growing sector, passed $100 million for the first time in the last quarter. The gap between the value of desktop and mobile ads is also decreasing. Right now there is about a $22 gap in the ad dollars earned per one thousand listening hours on the two platforms, down from a $32 gap a year ago. Listeners are also hearing more ads, as Pandora carefully increases its ad load and introduces more back-to-back ads during commercial breaks.

Looming over all of Pandora’s revenue initiatives, though, is the massive cost of acquiring music. The company spent $87 million on content acquisition costs (performance royalties for music artists and labels) in the most recent quarter, a 32 percent increase from last year. So far, efforts to lower this expense have failed. An attempt to push legislation lowering royalty rates through Congress last year simply earned the company the ire of many musicians. Now it’s trying a new tactic as it plans to negotiate with the Copyright Royalty Board, the government body that will soon determine the royalty rates paid by radio services through the reset of the decade.

(MORE: Emojis, Exploding Coupons Could Be Snapchat’s Future)

Like Spotify and other companies innovating in music distribution, Pandora has not yet proven that its model can create a profitable business. But it at least seems likely that the company will have more time to figure it out without Apple stealing all of its market share.

3 comments
jdrch
jdrch

How do you know that Pandora's numbers are due to Apple's presence in the radio market? I don't see any mention of Apple's numbers, so there's no definitive proof. Also, Apple and Pandora aren't the only radio solutions out there. There's also Spotify, Rdio, Slacker, etc. In fact, I'd wager Spotify has had the largest impact on Apple's music business of any of its competitors.

zeustiak
zeustiak

"Apple hasn't managed to the music service yet"

This was on below the link to this article...  Are we finally outsourcing these articles to China?

SteffenJobbs
SteffenJobbs

It's certainly possible in such a large arena that two companies can thrive.  Apple doesn't have to kill off Pandora to survive.  Apple could leave space for Pandora by not stepping all over Pandora toes and attempting to copy everything Pandora offers from its service.  It's only really greedy companies that try to put other smaller companies out of business entirely.  That's how Microsoft was and how Samsung is trying to grab major share at every price point possible.  Apple is still only going for the high-end of the market.  Apple is simply using iTunes Radio to get people to purchase iTunes music and they make it very easy to do so.

iTunes Radio already has plenty of well-heeled backers for advertising and Apple itself has more than enough money to operate at break-even if they wanted to run iTunes Radio that way.  With iTunes Radio there is no fine-tuning for tailoring of music for users and there's no lyrics.  Pandora is very user friendly.  Apple does not need to feel threatened by Pandora.  Why are people always looking for one winner when there can be many?  I honestly don't believe Apple is trying to ruin Pandora's business at all.