The following note regarding Pandora (P) came across my Briefing.com feed this morning:
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I chuckled when I first read that. IPOs really do defy logic. When terrestrial ruled, "Give us 22 minutes and we'll give you the world" served as one of radio's most aggressive slogans. Now, it's "give us until 2015 and if a gaggle of volatile, politically partisan federal court judges do what we sort of think they'll do, we'll give you a profitable business." Unreal.
And, of course, Pandora management, curiously, discounts its competition. Some of the most ardent Sirius XM (SIRI) loyalists routinely do the same thing. Simply put, the company executives who contend that Spotify and Apple (AAPL) via iTunes run in "different businesses" than Pandora commit the same self-righteous error that SIRI longs make when they claim that the satellite radio service has virtually no competition. Both display a somewhat pompous attitude that the respective businesses - "radio discovery" and subscription-service satellite radio - sit above the fray. Equally as unreal.
Based on what Pandora now implies publicly, I guess it has little respect for that pesky process of filing documents with the SEC. Here's what Pandora had to say about its competition in the Risk Factors section of its most recent S-1:
Our competitors include terrestrial radio providers such as CBS (CBS) and Clear Channel (CCMO.PK), satellite radio providers such as Sirius XM, online radio providers such as iheartradio, Last.fm and Slacker Personal Radio, subscription online on-demand music providers such as RDIO and Rhapsody and potential U.S. market entrants like Spotify ...
We also compete more broadly with providers of alternative forms of audio media and entertainment, which are purchased or available for free and playable on mobile devices, automobiles and in the home, such as iTunes audio files, MP3s, CDs and other forms of pre-recorded audio ... We face increasing competition for listeners from a growing variety of businesses that deliver audio media content through mobile phones and other wireless devices, such as iTunes (emphasis added).
These SEC filings serve to tell the world, with complete transparency, about the nature of a company's business. In theory, they exist to help investors weigh the risk/reward and see inside a company's business prior to making a buy, sell, short or hold decision. Sure, lots of what you find in an SEC filing is little more than legalese boilerplate material, but it's clear that Pandora's public face differs from its official regulatory face. In my mind, that's a problem that shows a smug disregard for the entire process.
Pandora executives and many diehard SIRI longs like to draw the distinction between "direct" and "indirect" competition or competing "more broadly" in a particular space. Cue unreal.
Netflix (NFLX) got a mention in that Pandora note. In addition to the real cost of content, you can draw other parallels, including comparisons regarding competition. While Netflix could call Coinstar's (CSTR) Redbox "indirect" competition, it should not. It could also refer to iTunes as indirect competition for the same reason Pandora did at its analyst meeting, but not in its legally-binding SEC document. Instead, Netflix labels Redbox and iTunes both as "principal competitors" in its annual report. That's the correct call.
Pandora management waxes little more than delusional if it thinks iTunes, for instance, is not head-on competition. Of course, as a prospective investor, I am not sure what to think. Maybe Pandora can clarify its stance. Maybe Maxim or Briefing got it wrong, though I doubt it. All Pandora needs to do is take one look at the iTunes platform to see the very real competitive threat. Features like the iTunes recommendation engine and automatic Genius playlists may not make the service pure "radio discovery," but they have a similar effect. And, more than that, they're a much more effective way at monetizing the user.
By the same token, Internet radio - whether "radio discovery" or on-demand - as well as iTunes competes directly with Sirus XM. All of these guys run in the same space. Consumers have a choice when it comes to entertainment. In the audio space, every single entity serves as direct competition to the other. Lately, I have moved between iTunes, Google's (GOOG) music beta and Sirius XM throughout the day. Time I spend with one represents time I did not spend with the other.
If you want to discuss broad competition, you have to go way out of bounds. I consider Netflix a competitor to Pandora and Sirius XM. You have a choice - tool around with Pandora, listen to something on Sirius XM or stream a cult movie at Netflix. What the dictionary says means little. In business, this dynamic defines competition.
Taking it further, the movie theater, a good book, a picnic in the park with lunch from Panera (PNRA) - all competitive threats. Now, of course, I do not expect any company in the audio entertainment space to account for or react to them all, but I do hope that they'll include more companies as direct competition than they exclude.
Just as consumers have an array of choices, so do investors. With the large number of possible investment choices, it baffles me as to why an investor would choose Pandora, particularly given the uncertainty that comes from the above-referenced note. Through this entire discussion, Sirius XM remains a sound bet.
There's a real distinction to draw between the two companies. Pandora management apparently made the claim that Spotify and iTunes are not in the same business (call it semantics, but that dismisses them as competition). Thankfully for SIRI shareholders, only extremist longs adhere to such a faulty belief system. Management at Sirius XM knows full well who the competition is and I believe they intend to address it more than they already have going forward.
Disclosure: I am long SIRI.
Additional disclosure: I am short NFLX via a long position in NFLX put options.