Does the Facebook & Spotify Partnership Threaten Pandora?
Source: Pandora
Pandora (NYSE:P) is facing a new threat on the horizon from Facebook and Spotify. Forbes reported that Facebook will soon launch a new music service with Spotify, which offers music streaming service and also allows users to sync their music and make purchases. Pandora is the leader in Internet radio and offers listeners personalized services based on preset choices and feedback. Apart from being available online, Pandora also has apps available on Apple’s (NASDAQ:AAPL) iPhone, Research in Motion’s (NASDAQ:RIMM) BlackBerry and other smartphones operating on Google’s (NASDAQ:GOOG) Android OS.
We currently have a price estimate of $10 for Pandora’s stock, roughly 50% below the current market price.
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The new service through Facebook will be offered to users in countries where Spotify is currently present, which currently excludes the U.S. Whereas, due to licensing restrictions, Pandora is currently confined to United States only. Therefore, although the two won’t competing for users’ listening hours just yet, they could soon be pitted against each other as both Pandora and Spotify are busy negotiating with music labels to expand to new countries for both services.
Personalized versus Social Preferences
Pandora’s Music Genome Project allows users to personalize their playlists based on preset choices and feedback. On the other hand, Facebook will allow Spotify to become more social. Although the scope of the partnership isn’t clear yet, the first reports coming out indicate that it will allow friends to listen to music simultaneously, comment on songs and post their music tastes through Facebook.
Generally, people have personal tastes in music and don’t typically rely on their friends to make their playlists. Therefore, although Facebook will help Spotify reach millions of new users, this partnership could potentially serves as a complement rather than a substitute to its service implying that it would not impact Pandora’s subscriber growth, even after the two services compete in the same markets. Instead, it could impact Pandora by competing for user’s listening hours – for instance if user’s listen to Spotify while browsing the Internet at home vs. personalized Pandora list when they are on the go.
Downside for Pandora
In a scenarios where Spotify could launch its services in the United States by 2014 and compete successfully with Pandora for user listening hours, this could lead to a decline in monthly online (at home or work) listener hours and also lead to lower monthly mobile listener hours. If we adjusted both of these by 1 percentage point lower after 2014 for our forecasts, this would imply almost 10% downside.
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Pandora’s stock value.