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A recent email from an acquaintance/friend reminded me of a post I had written on Pandora (NYSE:P) the day after the IPO in June. I never got around to publishing it for some reason, but I should have because there are a few smart points. Even though the stock is down substantially I believe that the market may not have fully recognized my concerns. Here is the original draft:

Back in February I wrote a post about how government meddling had made possible another round of speculative frenzy, and I specifically cited Pandora’s impending IPO as a reason for concern.

Well yesterday Pandora successfully duped millions of investors into taking on a really stupid bet. I had to take a picture of its banner hanging outside of the exchange–to me it represents the height of arrogance and speculation.

Pandora offers two services that Apple will likely obviate soon: (1) free randomly selected music on the cloud with interspersed advertisements and (2) paid randomly selected music on the cloud with no advertisements.

Apple’s iTunes already has a feature called Genius that recommends songs to users just as Pandora’s Music Genome Project. Unlike Pandora, Genius works only with tracks already owned by the iTunes user and therefore it cannot recommend tracks that the user doesn’t own. The appeal of Pandora is that it allows its users to discover music they are likely to enjoy, based off of their selection of songs and artists they already like.

Do you think the imaginative people at Apple can’t put Pandora out of business tomorrow? After the announcement of iCloud at WWDC, people should put two and two together. iCloud will provide every Internet-connected device with access to the world’s entire music library. Then if iCloud comes with the Genius feature, Pandora has no reason to exist. Apple can choose to run ads, too, or it can charge a fee.

It gets worse. If iTunes Match is approved by the big four music studios (yes, it’s a big if), people will download pirated music, gain iCloud access to the legitimate files and their only expenditure on music will be $25 per year–paid to Apple. OK, this is a big reason that iTunes Match will not be approved, but it is a major threat.

After the recent debacle at Netflix (NASDAQ:NFLX), bearish investors point out that Pandora is exposed to the same major risk, namely, that content providers may not cooperate with the company. I would point out the distinction between content providers for movies and content providers for music. The music business got crushed thanks to P2P software and piracy (this didn’t happen to the movie studios). So the music labels know that they don’t have a very strong hand. They would rather keep their music available on Pandora and make a little money than pulling the content altogether or requesting price hikes as Starz did with Netflix.

Another positive for Pandora is that advertisers know that it has a lot of active users, so Pandora may be able to generate enough ad revenue to offset content costs. Because of this, its position is pretty strong compared to other legitimate competitors.

Forget about the illegal competitors. Of course the best music site is Grooveshark because you can play whatever you want when you want. But the RIAA is going to shut that site down.
I think the major catalysts to a Pandora short would be the unveiling of iCloud and the lockup expiration in mid-December.

The Usual Unusual Apple Endorsement I Include in Every Other Post

The interesting thing about iCloud is that it is being announced before Apple’s official endorsement of 4G. Apple (NASDAQ:AAPL) has an intelligent habit of embracing technologies and formats only after they become generally accepted. Now that Apple has become so successful, this habit has become reflexive–new technologies cannot become generally accepted until Apple embraces them. So even though you see all these 4G advertisements everywhere, the technology has not yet become mainstream.

Apple’s iCloud push is going to ensure that 4G becomes mainstream. And not only that. Apple will be the first company to make cloud computing mainstream.

Source: Apple's iTunes Genius Plus iCloud Could Make Pandora Worthless