Pandora (NYSE:P) is done. Yes, this is the tired old song about how iTunes Radio will put it to sleep slowly. Sure, many will say Pandora has a few more features (shuffle comes to mind). Or how it's available in more countries. Or more devices. But still, Pandora is done.
Why is Pandora done?
It needn't be because Apple's (NASDAQ:AAPL) product is better, though the reviews and comments seem to indicate it is on several grounds: It's got better sound quality, less ads, better AI, and nearly 30 times more tracks and is 30% cheaper when paid ($25 per year versus $36 for Pandora).
The real problem for Pandora isn't even that iTunes Radio might be a competent competitor. It's worse than that. The real problem has several aspects:
- iTunes Radio will come pre-installed with every new iOS device, so new users are likely to not even try out Pandora;
- iOS is famous for the way its users migrate to the latest version, so most of the iOS users will get exposure to iTunes Radio (within 24 hours, nearly 30% of iOS users were already using iOS7);
- iTunes Radio will be much more integrated with iOS than Pandora can ever hope to be, starting with Siri and the Music store. So basically Pandora has no hope of competing with a similar product;
- Pandora has significant exposure to iOS. It's estimated that 42% of iTunes users also use Pandora;
- Apple does not have a need for iTunes Radio to be profitable. It's just an argument to buy iOS devices, where Apple makes the real money. So Pandora will be competing with a company that has unlimited money and no need for profitability.
This is basically a situation similar to what Netscape faced when Microsoft (NASDAQ:MSFT) decided to integrate the browser into the OS. Or the situation Stacker faced when Microsoft decided to do the same with disk compression utilities. And so on and so forth.
Any time the large OS purveyors decide to integrate a function into the OS, the suppliers selling that function have substantial problems competing. And in Pandora's case this is made even worse because the stock is priced for perfection as it is, trading at 100 times FY2015 earnings estimates and barely being profitable now. Expectations also call for revenue growth rates of 50 and 40% in the next two years - growth which will be made much harder by the loss of iOS users (and Google is having a similar -- though less well-known - initiative as well).
Even putting aside the fact that iTunes Radio might be better, cheaper and with less ads, Pandora faces a tremendous battle for which its stock is certainly not priced. It's dead on certain that new iOS users will be unlikely to adopt Pandora, and it's also likely that due to better OS integration even existing Pandora users might migrate towards iTunes Radio.
The one important thing to understand is that Pandora is not priced like this risk exists. Other than the Bernanke bubble, there's no reason for it to trade at the levels it presently does given this clear and present danger presented by iTunes Radio. The only reason to hold Pandora seems to be an ongoing short squeeze since 16.2% of the outstanding shares are sold short.
I know the story is old, after all Apple announced it would be fielding iTunes Radio back in June. But only this week did the product get reviewed, and both the reviews and comments indicate that the impact on Pandora is already underway. It might take one or two quarters for Pandora's numbers to start reflecting it through a rapid slowdown of growth, but the outcome seems largely inevitable.
I went short Pandora this past Friday given the reactions to iTunes Radio. Only a very inferior product would not be a problem for Pandora, and the reactions seem to indicate that iTunes Radio is not inferior, quite the contrary.
Disclosure: I am short P. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.