Market caps: 2.55 Billion for Pandora, 4.32 for Netflix. Their focus is identical (streaming content) in parallel mediums (music and video). Both acquire content in the same manner, with their main difference lying in how they generate revenue. Netflix, unlike Pandora, avoids advertisements. However, it is common practice for adolescent streaming media businesses to try on varying revenue outfits (see Hulu). The ultimate goal of teenagers is to gain confidence, and these outfits will head in the direction of a uniform. Thus, it is fair to say that P and NFLX are very similar, and it is reasonable to speculate that P has outperformed NFLX simply because Pandora is pre-pubescent and Netflix is experiencing growing pains. These are stocks valued on expected growth. As tech companies, they don't have any distinctive technology. With Pandora and Netflix, the primary moat (value) is name recognition. In summary, the companies are comparable.
This situation lends itself to a speculative arbitrage play: long NFLX, short P.
Personally, I'm turned off by NFLX. It's a little too sexy for me. So I think of this as an arbitrage play where I'm long Netflix and short Pandora, except I don't want to buy Netflix so I'll accept some short exposure to it. But feel free to hedge your bets by buying Netflix. Depending on how much Starbucks he's had on any given day, Jim Cramer may or may not agree with you.
There is a man named Yuri Milner. On October 21, Wired profiled him. I highly recommend reading the entire thing. Although the analogy is one-dimensional, I would describe Milner as the Internet's Warren Buffett, in that he buys large stakes in companies, and these companies go on to experience price appreciation. Facebook, Zynga, Twitter, and Groupon (GRPN) are in his portfolio. Milner participates in panels alongside people like Mark Zuckerberg and Eric Schmidt. So what? Milner is unique in how he got to this position. He has proven sagacious in forecasting the outcome of shifting economic structures. So Yuri Milner is powerful both financially and intellectually. There are few people with his level of overlapping intelligence and wealth. Yuri Milner is truly exceptional.
Milner bought shares in a company called Spotify. You may have heard of it. It has a partnership with Facebook. Sean Parker, the guy who killed Myspace, is now with Spotify, and it is competing with Pandora. Never mind that Parker also co-founded Napster, which crippled the record industry, and Parker sees Spotify as an actualization opportunity for his lost baby Napster. Let's look at Myspace.
Myspace was once a pretty cool free website. You could customize the look of your page as you explored various connections among friends. Pandora was pretty cool because you could customize the sound of your free music as you explored various themes among songs. Ultimately the problem with Myspace which Facebook exploited was that Myspace lacked minimalist elegance. There were a few too many choices. The graphics were a bit too flashy. Identities were a bit too fantastical. Facebook came along with a streamlined interface which put the experience before the website. Friends, whom Myspace forced you to sort through by pseudonym, were required by Facebook to identify themselves directly. Gradually a trend was identified wherein more affluent users migrated to Facebook, often maintaining their Myspace accounts yet representing an exodus of advertiser dollars from Myspace. Sociologist Dana Boyd, prior to Myspace's crash, identified this stratification wherein poorer, younger, less mainstream, less white users preferred Myspace (advertiser demographics). In fact, Myspace increasingly was euphemized as a place for young people to discover new music. Myspace was where you lingered if you hadn't graduated to Facebook yet. Spotify is where you can go to get the music you want, directly. Pandora is where you go to discover new music if you don't have a Spotify account yet.
Spotify is the Facebook to Pandora's Myspace. Did Facebook really kill Myspace? No, Myspace was destined to fail, and Facebook destined to take its place. Pandora is just too Myspace. When I went short Pandora, I called my little brother, who is a recent high school graduate. He said he used to listen to Pandora in the high school library, and uses it from time to time, but not so much any more. He found the ads unpleasant. Ultimately Pandora's advertisements are part of a larger problem. Pandora makes inefficient use of its listeners' attention. Yuri Milner describes the internet as a scaffolded global brain for which social media is playing an important role. Inelegant websites like Myspace and Pandora represent obsessive tendencies, ADHD, or similar disorders reducing the efficiency of this brain. More disciplined structures will take their place. People are increasingly viewing our own attention as a commodity, and the websites that respect our attention best will win our time, and corresponding advertiser dollars.
I hear that a lot of Myspace people don't have jobs. If you work at Pandora, and Mr. Napster/Myspace Killer and Mr. Internet Buffett are directly competing with your Myspace-resembling music website, you should probably look at selling your shares to hedge against unemployment. Which you will be able to do when the Pandora employee lockout ends in December.
Disclosure: I am short P.