Spotify Launch Should Be Music to Pandora's Ears

Includes: P, SIRI
by: Spencer Osborne

The rumor mill is churning once again with reports that Internet radio music service Spotify will be launching in the United States sometime during the next three weeks. The latest has a target launch date sometime between July5th and July 15th. Spotify, already successful in Europe, has been contemplating a United States Launch for quite some time.

While the launch of yet another Internet radio service may mean more competition for the like of Pandora (NYSE:P), it should actually be looked at as a giftwrapped opportunity for the Internet radio leader. The reason is that Spotify will come in at a price point of $10 per month. Having another major player with a higher price point gives Pandora the ultimate in flexibility.

Pandora, which I feel needs to raise prices on its subscription tier to be viable, now has another major player with a higher price point. This will actually help Pandora accomplish a price increase if it so desires. In fact, Pandora could double the price of its subscription tier (currently $3.99 per month), and still be less expensive than Spotify, MOG, and even Slacker On-Demand. It will also make the free ad supported version of its service more attractive to consumers who simply do not see the value in paying for radio.

Yes, Spotify will take some ears away from Pandora, Sirius XM (NASDAQ:SIRI), and even terrestrial radio, but in the beginning the numbers will not be very material. The beauty here is that if Spotify, which carries name recognition, starts to see success in the U.S. at $10 per month, it will help to validate the Internet Radio model. This is good news for investors in Pandora.

The business model of Pandora has been the big question mark overhanging the stock. The company is relying heavily on an advertising supported model, which puts it in direct competition with terrestrial radio to get ad dollars. At the same time it has more flexibility and music genres that put it in competition with other Internet radio companies as well as satellite radio. It seems that Pandora fits in a niche somewhere between terrestrial and satellite, and perhaps that is the sweet spot.

For Pandora, having another major Internet radio player in the market is good news right now. The more attention the medium gets, the more exposure Pandora will have. Ever wonder why fast food restaurants tend to cluster together? The answer is that they all do better because of it. Yes, they compete, but in the end that competition makes each brand more healthy. Spotify hitting U.S. shores is good for Pandora.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .