Pandora stock falls on fears of Apple competition
SAN FRANCISCO (AP) — Pandora Media Inc.'s stock slipped Thursday on renewed speculation that Apple Inc. is preparing a new music service that could lure listeners and advertisers away from the steadily growing Internet radio station.
THE SPARK: Nomura analyst Brian Nowak concluded Apple has ample reason and plenty of firepower to create a service offering a massive library of digital music that could be played on mobile devices and personal computers. The service would likely allow users to specific their tastes so they can to listen to a stream of free music that appeals to them, a concept that has already won both Pandora and another rival, Spotify, millions of fans around the world.
Nowak decided to take a closer look at the pros and cons of Apple entering the music-streaming field after The Wall Street Journal and Bloomberg News recently reported the company is negotiating with major recording labels for the licensing rights required to launch the service early next year.
In a report released Thursday, Nowak estimated Apple could easily afford to spend about $1 billion for the rights to a music-streaming service without leaving a major dent in its profit margin. Protecting its hefty margins has become more important to Apple has it faces more competition that has already prompted the company to introduce a smaller and lower-priced version of its iPad, which has so far dominated the rapidly growing tablet computer market.
A free music streaming music could siphon up to $1 billion in sales from Apple's iTunes store, Nowak said, but he reasoned some of that loss could be offset if a music-streaming music persuades more people to buy iPads and the company's iPhone. Apple, which is based in Cupertino, Calif., also could use the music-streaming to sell more digital advertising, something that it has struggled to do so far.
If Apple were to introduce a music-streaming service as a built-in app on the iPhone and iPad, Nowak said it would pose a significant threat to Pandora's future growth. He didn't assess the impact on Spotify because that company remains privately held.
THE BIG PICTURE: Although it has been a hit with music lovers, Pandora hasn't been able to win over investors because its popularity hasn't translated into profits.
The company, which is based in Oakland, Calif., hopes to make money through a combination of advertising and subscriptions sold to listeners willing to pay for a commercial-free version of Pandora's service. That combination hasn't been enough to offset the music-licensing fees and other overhead required to run Pandora's service. Pandora lost $25.6 million on revenue of $182 million during the first half of the year.
Meanwhile, Pandora's radio station is striking a chord with more people. Listeners tuned into a total of 1.25 billion hours on Pandora during October, a 65 percent increase from last year, according to statistics released Thursday by the company.
THE ANALYSIS: Reflecting his worries about the problems that Apple might pose, Nowak lowered his price target on Pandora's stock to $7 from $8.50. The company went public at $16 per share in June 2011.
SHARE ACTION: Pandora's stock shed 40 cents, or nearly 5 percent, to $7.84 in late afternoon trading. The shares have ranged from $7.32 to $15.89 in the past year.