Competition in the digital music space is heating up as U.S. advertisers are getting ready to increase spending for online and mobile radio services this year. Recently, Google (NASDAQ:GOOG) acquired music streaming app, Songza, for an undisclosed amount to compete with players such as Pandora Media (NYSE:P) and Apple (NASDAQ:AAPL) in the $2 billion digital music market.  With this acquisition, Google has become a bigger competitor for Pandora, who is already facing stiff competition from iTunes, iHeartRadio, Spotify and Sirius XM (NASDAQ:SIRI). Although Songza in itself wasn’t a big threat for Pandora, its integration with Google is a concern for the Internet radio provider.
While Pandora offers music using its Music Genome algorithms, Songza is a music curation app that leverages the knowledge of its music experts instead of computers to generate a playlist for its users. This way, Songza offers music based on users’ mood, while Pandora uses algorithms based on songs, artists and music type to build playlists. With Songza’s unique method of preferring human judgement over algorithms to build playlists, Google might be able to exploit Pandora’s weakness.
Google does not plan to make any immediate changes to Songza, but intends to integrate the music curation app with its Google Play Music All Access service and a yet-to-be launched paid YouTube service. Also, under Google, Songza will have the liberty to focus more on product development rather than increasing user base, which will allow it enhance the app’s usability. Songza’s chief executive believes that the app’s technology can also be used for providing targeted ads and relevant recommendations, an area on which Google already focuses.  This is another concern for Pandora since it earns a majority of its revenues from mobile ads.
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Our price estimate for Pandora stands at $24, implying a discount of less than 15% to the market price.
Songza’s Music Curation Gives It An Edge Over Pandora
At the heart of Pandora is its Music Genome Project and its specialized algorithms for generating playlists. This technology delivers music based on each individual’s preference and taste. The extensive musicological database of the Music Genome Project has been meticulously built by a team of professional musicians and musicologists analyzing hundreds of attributes for every song in their collection including song type, artist, genre etc., to capture the fundamental musical properties of each recording. The highly detailed process of building a playlist allows Pandora to quickly adapt to its users’ tastes.
However, user tastes and preferences are highly subjective and depend on other variables such as mood, weather, activity, time of the day, etc. Since incorporating such factors in an algorithm isn’t easy, human judgement is required to assess these attributes and provide music that is most relevant to users at a particular moment. This is Songza’s USP (i.e., Unique Selling Point). At Songza, the process of building a playlist is highly personalized with a team of 50 music curators (Rolling Stone writers, DJs etc.) constantly working to analyze user moods to build various playlists. For instance, users could say “breezy summer songs” or “sad rainy day songs” on the app and they will get the relevant playlist. With its curated playlists, Songza appears to be a step ahead of Pandora in the music streaming space, which has caught Google’s eyes. The search giant’s interest in the company can be gauged from the fact that it paid a significantly higher amount for the app than what it was originally planning to ($ 15 million), according to media reports.  Songza was reportedly approached by several interested parties, which might have led to a bidding war that pushed the price tag upwards.
Google’s Songza Is Threatening For Pandora
As a small company alone in the market, Songza wasn’t a big threat for Pandora as taking share from the most popular player in the digital music space wasn’t easy. While Pandora has close to 76 million active users, Songza just has 5.5 million monthly active users. 
However, under Google, Songza is a much bigger threat for the Internet radio provider. Although Google doesn’t plan to change Songza’s business for now, it is looking to add Songza’s playlists to its Google Play Music All Access service in the near future. Although Google Play uses human curation to a certain extent, most of its playlists are generated by algorithms, which doesn’t differentiate it from other players in the market. However, with Songza in its arsenal, Google can gain a competitive advantage over algorithm based music providers such as Pandora and Spotify. Furthermore, the search giant is looking to amalgamate Songza to its paid YouTube service, set to be launched in a few months.
Songza is also likely to help Google in its quest for providing targeted ads and recommendations. Google has been looking to improve its ads in the Google Play store to ensure that the most relevant recommendations reach its users, and Songza technology can help it do so. While claiming that Songza is a good bet for providing targeted ads and relevant recommendations, chief executive Eric Davich pointed a Procter & Gamble sleeping product ad that features in Songza’s nighttime playlists. By providing appropriate and fitting ads to its users, Google’s music app can draw both users and advertisers’ attention. This, in turn, can cause problems for Pandora.Notes: