Apple (NASDAQ:AAPL) is reportedly going to launch a customizable radio service soon, similar to what Pandora (NYSE:P) offers.  The news led to sharp decline in Pandora’s stock price last Friday, indicating that market is weighing heavily on this development. After all the new entrant will be Apple – the company that has dominated online music via its iTunes store for a long time and boasts of widely used hardware devices such as iPhone, iPod and iPad. Will Apple really be a fierce competitor for Pandora? Let’s look at some facts.
There is an issue with internet radio service in the U.S., and that is the royalties. These royalties are fixed by intermediary bodies and internet webcasters do not have much flexibility regarding negotiation. This has made it difficult for Pandora to be profitable on its ad-based business.
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Apple previously tried and dropped the idea of internet radio due to the same reason, but it appears that this time the company trying it differently. Apple is in the process of negotiating its own deals and the likelihood of success is a bit blurred in this case as we believe that the intermediary body SoundExchange will not let its role to be sidelined in such negotiations. It is unclear whether Apple can really strike music deals that will let it create a profitable service just based on ad revenue stream.
Furthermore, Apple will not make its radio service available on Android-based devices, thus limiting the subscriber base. However, it still does not mean that Pandora could sit cozily while Apple launches its service. Almost one-third of the U.S. smartphones are iPhones and that makes it a sizable market. In addition to this one should consider iPads & iPods which will also be capable of streaming Apple’s radio service.
Apple’s entry can certainly affect Pandora’s user base and listener hour growth. From Pandora’s last earnings release, it is clear that overall registered user growth has slowed down significantly while active users continue to grow. Active users are all that matter for the company, and this will definitely slow down if Apple enters in internet radio arena. That said, it is unclear with current information whether Apple will actually create a customizable radio service.
Our current price estimate for Pandora stands at $7.90, implying a discount of about 25% to the market price.Notes: