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Why Pandora is Soaring

  +Follow October 2, 2013 10:34AM
Tickers Mentioned:

Like Napster and iTunes before it, Pandora Media, Inc. (P) changed the way users listen to music. While Rhapsody pioneered internet music streaming in 2001, Pandora took it to the next level, and has dominated the medium for five years. While other streaming-radio services have since followed Pandora’s lead, the Oakland, Ca.-based company hasn’t lost a step, and on Oct. 1 touched an all-time high north of $27 a share. But in an increasingly crowded marketplace, facing competitors with superior libraries and features, the question is how they not only stay relevant, but dominant.

Apple Inc. (AAPL) , who still have 62 percent of the total digital music market with iTunes, launched iTunes Radio last month. An app which came with the iOS 7 download,  iTunes Radio added yet another viable streaming service for Pandora to deal with, who already have to contend with Google Inc.’s (GOOG) Google Play, not to mention Rdio, and Spotify.

The privately-owned Spotify and Rdio are especially dangerous competitors. They boast several advantages over Pandora: music libraries of over 20 million songs to Pandora’s 1 million; no cap on free listening (Pandora only allows 40 hours a month before charging); and in the case of Rdio, a state-of-the-art interface that provides a “visceral and beautiful” user experience.

Yet, Pandora keeps on trucking. They responded to the renewed competition by reporting a 25 percent uptick in active users, who now total 72.7 million. It seems counterintuitive, as the other services offer seemingly superior products. But Pandora isn’t succeeding by means of being better, but rather because listeners don’t want to abandon the work they’ve put in already. As they are becoming accustomed to the idea of using several platforms at once, Pandora survives because people are used to it and don't see it as an "either/or" choice.

Pandora’s main appeal is that users can craft radio stations tailored to their preferences via a series of “thumbs up” or “thumbs down” to certain songs. Simply put, users have already put a lot of work into designing their Pandora stations, and they don’t want to start over. Users who have been with Pandora since the beginning are likely to prefer the service to other sites that haven’t had the time to amass, as the Spokesman asserted, “the intelligence that Pandora has gained from tens of billions of interactions.”

According to some critics, the continuing success of Pandora could just be a sea change away from broadcast radio to internet – an “all boats rise in high tide” kind of market. ComScore analyst Andrew Lipsman compared streaming music companies to social media, saying "Look back to Facebook Inc. (FB) and MySpace as an example. There were a lot of people using those things in parallel at the same time."

Pandora rose 6.37 percent to hit $27.16 a share. On Oct. 1 Cannacord Genuity raised their price target from $25 to $30 a share.


(image courtesy of Flickr)

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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