Can Pandora & Spotify Co-Exist?

Recently Pandora Media’s (NYSE:P) CTO Tom Conrad, who leads the company’s design, development, and technical operations teams, talked about how he views Pandora’s future. ^[1] One of the thing that Tom mentioned was that he views Spotify as a complementary service to Pandora. Spotify has been leveraging Facebook’s (FBOOK) platform to expand its business in the U.S. We believe that Pandora may be as much threatened by Spotify as by its radio competitors like Sirius XM (NASDAQ:SIRI) and Clear Channel Radio.

So can Spotify really co-exist with Pandora in a healthy manner?

See our full analysis for Pandora Media

Why Does Pandora See Spotify As Complementary?

Pandora’s CTO puts forth the argument that Spotify is like a music store, which fundamentally differs from radio service. For years radio and music stores have co-existed peacefully and he asserts that will likely stay that way in the future as well. He further mentions that Pandora provides an element of semi-randomness due its radio nature, and further provides a way for music lovers to discover music from new artists. On the other hand Spotify is clearly an on-demand service and one needs to know exactly what they want to make good use of it.

In essence, Tom feels that Pandora and Spotify serve two distinct needs.

Device Commonality May Mean Something Different

However, we feel that Pandora and Spotify may not turn out to be the best of friends. Especially because of the broader trend of media convergence. The argument that radio and music stores have existed peacefully for a long time does not take into account the fact that typically radio is listened to in the car and via in-car radio systems while music stores sell on-demand music (traditionally cassettes and CDs) that historically spanned from cars to home stereo systems and smartphones. At least there was a distinction in terms of which devices were preferred for what service.

With the proliferation of mobile devices, services like Pandora and Spotify share common devices such as smartphones, tablets and PCs. The penetration in cars is still quite low when compared to services like Sirius XM radio. So if a consumer listens to Sirius XM or terrestrial radio in the car, will they be willing to give too much time to Pandora on other devices?

In essence, the total potential listening hours for anyone are limited and are likely to split across Pandora and Spotify as well as other music services as all try to compete on same devices.

In the near term, Pandora and Spotify can coexist in a healthy manner if Pandora slowly takes market share from terrestrial radio and increases its pentration in cars. This will drive continued growth in users and help sustain listener hours per user. However longer term it’s ultimately a competition for listener hours and reaching the user wherever they are.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Pandora: Spotify is our friend, not a competitor, GigaOm, Nov 11 2011 [↩]