Pandora Media (NYSE:P) is one of the largest Internet radio providers in the U.S. with more than 75 million active users. While the company’s active user count has increased at a robust pace historically, it is likely to slow down going forward due to growing competition from Sirius XM (NASDAQ:SIRI) and emergence of free music streaming services such as Spotify, Google‘s (NASDAQ:GOOG) Songza and Apple‘s (NASDAQ:AAPL) Beats. A couple of months back, Pandora’s stock took a hit after Spotify reported that it crossed the milestone of 10 million paid subscribers.  Earlier this month, the company’s stock plunged by more than 10% after Google revealed that it has acquired music curation app Songza.  Both these instances indicate that the market is considering these services as a serious threat for Pandora.
With existing cutthroat competition in the free music space, Pandora has decided to take on terrestrial radio services and satellite radio provider Sirius XM in the car market. Back in 2010, the Internet radio provider had partnered with Pioneer, an electronics manufacturer, to offer Internet radio in cars.  This year, the company is planning to launch its radio services in 135 different car models from 26 auto manufactures. Five million new users have already signed up for Pandora’s services in cars.  In the context of new vehicle sales, models that are not satellite enabled may be Pandora’s prime target because it’s much easier to beat terrestrial radio over the quality of content than satellite radio. However, customers who are buying models with OEM-installed satellite radio and are ready to pay for radio services are most likely to prefer Sirius XM over Pandora due to the diverse and unique content of the satellite radio provider.
Our price estimate for Pandora stands at $24, implying a discount of about 5% to the market price.
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Pandora Likely to Gain Listener Share at the Expense of Terrestrial Services
In 2010, Pandora joined hands with Pioneer to provide Internet radio in cars that have Pioneer music systems installed. The device detects Pandora settings when a phone is connected with the system and automatically plays Internet radio. Since the launch of its services in cars, Pandora has struck deals with the world’s leading automotive manufactures such as BMW, Chevrolet, Ford, Mercedes-Benz, GMC, and Lincoln and with suppliers of major automobile manufacturers to integrate the Pandora service into current and future automotive sound systems.  This move helped Pandora expand its service network beyond PCs and Mobile devices, thus providing a complete solution to its customers.
Recently, Pandora’s vice president of strategic solutions, Heidi Browning, stated that about 135 models from 26 different automobile makers coming out this year will have pre-installed Pandora services. This figure is roughly one-third of all the new models of 2014. According to Browning, all the best-selling passenger vehicles in the U.S. now come with Pandora services. The Internet radio provider currently accounts for just 9% of total radio listening in the U.S., and it has a tremendous opportunity to increase this figure with its aggressive foray in the new vehicle space.  While there are no clear signs that Pandora will be preferred over satellite radio provider Sirius XM, it is likely to take away some listening time share from terrestrial radio services, who currently dominate the market with over 80% share. 
Pandora can even ensure monetary gains from this opportunity by providing better advertisements than terrestrial services, thus drawing the attention of listeners and advertisers. Pandora’s ads are more interactive since they have both visual and audio components, as opposed to just audio in case of terrestrial radio ads. The radio ad industry, which stands tall at $17.6 billion, generates almost 50% of its revenues from cars, while this medium accounts for just 44% of the total listening hours.   This indicates that ad revenues per 100 listener hours in car radios is slightly higher than other medium.
However, Pandora isn’t the Only Challenger
While Pandora’s increased proliferation in cars is expected to help it gain listener share, we believe that Sirius XM presents a better challenge to terrestrial services than Pandora. Currently, Internet radio services and Sirius XM account for 11% and 8% of total listener hours in cars, indicating that they are at the same level at present.  However, Sirius XM’s diverse and unique content gives it a slight competitive edge over Pandora. While Pandora’s content is limited to music, Sirius XM broadcasts a wide array of talk shows, sport shows, news channels and music shows.
Even though Pandora’s services are free, there are almost 60 million satellite enabled vehicles in the U.S., which will make it easier for Sirius XM to sell its subscription because car owners might not want an inactive satellite radio set in their vehicles.  Therefore, we believe that Sirius XM will gain listener hour share in cars at a faster rate than Pandora. However, it is almost certain that terrestrial radio’s share will come down from its current level of 80%.Notes:
- Spotify hits 10 million global subscribers, Spotify Press Release, May 21 2014 [↩]
- Google in Deal for Songza, a Music Playlist Service, The New York Times, Jul 1 2014 [↩]
- Pandora Partners With Pioneer On Internet Radio For Cars, Gigaom, Jan 6 2010 [↩]
- 5 million new Pandora users have signed up in the car, Venture Beat, Jul 10 2014 [↩]
- Pandora Shifts Into High Gear, Pandora Blog, Sept 29 2011 [↩]
- Pandora Makes Mark With In-Car Subscriptions, Bidness, Jul 11 2014 [↩]
- The remarkable resilience of the old-fashioned radio in the US, Quartz, Apr 4 2014 [↩] [↩] [↩]
- Network, Digital, Off-Air Shine as Radio Ends 2013 in the Black, Radio Advertising Bureau, Mar 14 2014 [↩]
- Sirius XM (SIRI) at the Bank of America Merrill Lynch Global Telecom and Media Conference transcript, Jun 3 2014 [↩]