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Pandora Media (NYSE:P) went down by almost 3% last December 6. Investors got affected by Spotify's announcement that it plans to offer free streaming to mobile devices. Those who sold their P shares got scared that Spotify's latest move will eat away Pandora's main bread and butter.

Spotify used to charge a monthly $10 fee for mobile users to enjoy its streaming services. Pandora was able to gain more active users, around 72.4 million versus Spotify's 24 million, mainly because of its unlimited free streaming to smartphone and tablet owners. Mobile users already account for 80% of Pandora's audience so it has a large moat to support its mobile advertising business.

Investors are worried that Spotify's latest move can wreck Pandora's path to profitability. Pandora has been enjoying a banner year in 2013. The stock is up more than 200% since January. Before Spotify's announcement, Pandora continues to receive good buy ratings despite posting another negative income loss this 3rd quarter.

However, I am confident the Pandora Media is way too strong and too tough now to suffer any serious adverse effects from Spotify's move. Yes, it may lose users to Spotify but Pandora's superior platform for targeted advertising has gained wide acceptance among advertisers. Pandora's ad revenue stream will continue to grow. Its mobile ad business is already the third largest, behind only Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB).

Pandora Brushed Off iTunes Radio, It Can Survive Spotify

Apple's launch of iTunes Radio did not slow down the growth of Pandora. Investors back then predicted a surefire devastation for Pandora because of Apple's (NASDAQ:AAPL) streaming music venture. Against all expectations, Pandora actually increased its market share after the launch of iTunes Radio.

Spotify's decision to offer free streaming to mobile listeners is just a minor threat that Pandora has to live with. I believe that more people will keep using Pandora's free services because of its unique and accurate personalized delivery of music.

The 3rd Quarter Financial Report is Impressive

Based on the remarkable numbers disclosed in the report, Pandora Media is on track to meeting industry expectations. The 50% year over year growth in 3rd quarter revenue shows the company is gaining momentum in monetizing its large subscriber base. The $180.4 million the company earned this quarter is substantially higher than 2nd Quarter 2013's $157.35 million. Pandora is well on its way to beating last year's annual gross revenue of $472.14 million.

This streaming radio company is also starting to demonstrate how its unique Music Genome Project-based customization algorithm can be used for targeted mobile advertising. Pandora's mobile advertising revenue is more than $104.9 million for this 3rd Quarter, 58% higher than last year's ad sales for the same period.

Pandora's ad revenue is bigger than the money it earns from subscription fees - making it more like a traditional radio company with the power of the internet behind it. The company has a great advantage over satellite radio companies like Sirius XM (NASDAQ:SIRI). There are more smartphones than car radio listeners now. Pandora only needs to consistently increase its number of listeners to keep the money rolling in.

This requirement is not hard to do. Unlike land-base radio companies, Pandora gets a big boost from increasing sales in smartphones and tablet PCs. Pandora is also enjoying the pioneer-status for streaming radio, other competing brands can only play catch up. The company has established a solid footing, a blue-chip status among would-be copycats.

Music Genome Project And Targeted Advertising

As of October 2013, Pandora has an 8.06% share of U.S. radio listeners, 6.61% higher than last year. It also has 70.9 million active users, a 20% increase from last year. If this trend continues, Pandora may hit 100 million active users in less than five years. This huge pool of users is a gold mine for targeted advertising. Compared to regular ads, targeted ads usually pay higher. Pandora's scientific auto music customization for its listeners is a juicy channel for this kind of advertising. Thanks to the intelligent algorithm behind Pandora's Music Genome Project, individual listeners can be accurately classified based on their music tastes. Marketers like this kind of highly-personal categorization of demographics. The appropriate ads can therefore be delivered only to the right listeners.

The management team behind Pandora is doing a great job promoting this fact. The company keeps on gaining more and more advertising clients to its platform. The rapid rise of its advertising business this year has allowed Pandora to remove the 40-hour limit on free listener accounts. Non-premium users of Pandora are again enjoying unlimited streaming radio services.

Double the Advertising Time for Free Users

Pandora can improve its profit margins easily by increasing the advertising time for free users. I believe it is only doing 1 minute ads for every hour of streaming for free accounts. Correct me if I'm wrong on this, but whatever is the correct amount of advertising time, Pandora should double it to increase its income. Four or five minutes of ads every hour of free personalized music is fair enough.

Most freeloaders on Pandora will not abandon the company if management implements double advertising time. These smartphone users are already getting bombarded by so many ads from other apps. A few more targeted ads over their free streaming music is nothing catastrophic.

Summary

Spotify's move to offer an unlimited streaming music service to mobile users is a minor adversity for Pandora. It should not be a major concern for investors. Pandora has a proven track record of continuous growth in the face of competition. It has the best platform for mobile advertising so I still believe that this company will finally show a profit by the end of 2014.

Source: Pandora Stronger Than Spotify