It’s obvious that Pandora ($P) doesn’t make much sense as a standalone web radio / advertising play but it’s also obvious that what they’ve built has value.
The trouble is, every time news breaks about Apple’s in-progress streaming music venture, Pandora’s share price gets leveled.
By way of full disclosure, I’ve traded $P a few times since it’s come public and I love the product but I currently have no position in the stock.
Today Pandora’s stock lost 10% of it’s market cap because Apple announced an agreement with Warner Music and reports surfaced about the ad sales team being shifted over to what’s being referred to as “iRadio” . This kind of thing has happened before to Pandora shareholders and will happen again as Apple’s iRadio comes closer to launch. So far, Pandora’s stock has shaken off these episodes but I’m not sure that will continue as Apple’s product gets fleshed out even more.
iRadio may end up being a “Pandora-killer” but it doesn’t have to be.
Android and its OEM supporters are showing us every day that Apple domination isn’t a given just because Cook and Ive got up in the morning. Pandora could not only survive but thrive as Apple’s entry into the field bolsters the concept of streaming radio in the eyes of both consumers and advertisers who haven’t bitten yet. In this same way, we saw the Starbucks entry into k-cups and home-brewing systems validate the space – at first it scared the hell out of incumbent Green Mountain Coffee shareholders, now the realization has dawned that it’s a huge market and both companies can win.
There is a loyal customer base for Pandora and a local advertising business that is both profitable* and growing.
The company is doing $500 million-plus in sales each year, mostly in ads but with some subscription revenue, and it has a tiny market cap (relatively speaking) of under $3 billion.
It’s got a ton of apps loaded onto people’s phones, a great brand, relationships with artists and labels and an income-generating mobile ad model that actually works.
There are probably ten potential suitors I could make the case for but of all of them, Pandora and Amazon are probably the best fit for each other.
Amazon has no real answer to Spotify, iRadio or Pandora and will probably be selling a lot less MP3s and CDs as these services become the norm. This is exactly what Apple is worried about vis a vis iTunes and that’s why they’re launching a streaming music service in the first place. I keep buying music because I’m conditioned to want to own what I love. My kids will not suffer from this and will be glad to merely have access. In a future like this, Amazon should want to be there and Pandora is an easy way in.
Pandora can also help them sell physical products as well as content downloads via the free service’s targeted ads and user interface, this is a total no-brainer, it even compliments their investment in Living Social and could become a conduit to more local vendor partnerships.
In the meantime, Amazon could bear the infrastructure costs at a fraction of what Pandora pays so the business becomes much more profitable overnight. The innovation possible under Jeff Bezos’s wing goes without saying.
The alternative for Amazon would be to build out a streaming music service internally and spend a lot on marketing and positioning to get its 165 million or so users hooked on it. Why bother when for the cost of two days’s worth of Amazon’s revenue, they can own the best product on the market and explode its user base?
Just a thought.
* the ad business within Pandora is profitable but the company on the whole is not quite there yet. In my view, the potential benefits of scale that a larger company could bring to the company’s cost structure would be a key reason for a deal to take place. For more on the financials, visit this recap of their last earnings report at Insider Monkey