Pandora: Internet Radio's Apple?

Includes: AAPL, P
by: Modernist

If you're long Pandora (NYSE:P), you're hoping it's the next Apple (NASDAQ:AAPL). Apple makes money by perfecting existing technologies and selling them in a cute package. Since Pandora doesn't have any special technology, and will be competing with a lot of companies, the only hope for Pandora is to be like Apple. Indeed, if Pandora can manage to do this, the shorts are going to lose a lot of money.

This is not a comprehensive article about Pandora and should not be taken as one. This is an article about Pandora and Apple. Here are five reasons Apple and Pandora are not similar:

  1. Steve Jobs bitterly defended intellectual property. Pandora, on the other hand, has no real intellectual property. The “Music Genome Project” is a marketing ploy. If you see an article in the Wall Street Journal discussing Pandora's sizable IP lawsuit against Google (NASDAQ:GOOG) or Spotify, then you'll have proven me wrong. You would laugh at me if I told you Pandora has an enforceable patent on linear algebra. So why aren't you laughing at Pandora?

  2. Apple emerged in the context of Microsoft (NASDAQ:MSFT). Pandora is trying to emerge in the context of radio. But Microsoft emerged in the context of the vacuum that came before it. So Pandora is more like Microsoft than Apple. Nothing wrong with that. Bill Gates is rich. I'm just saying, Pandora is more like Microsoft than Apple in terms of its background. Certainly, Apple overtook Microsoft only when it stepped out of the computer shadow with the iPod. But there is a reasonable argument that Apple had to get its start by drafting off Microsoft. What company is Pandora drafting off of? Is radio giving Pandora the slipstream Pandora needs? How about Sirius (NASDAQ:SIRI)?

  3. Apple sells hardware primarily. Pandora sells software primarily. It's easier to differentiate hardware than it is to differentiate software. Consumers are more willing to pay for a premium phone than a premium OS. The success of Android as a generic confirms this. This reduces the ability of Pandora to be like Apple by differentiating fundamentally identical technologies (ie. Zune). Pandora will never be a status symbol. In five years, no one's going to look down on you for having Google Music on your smartphone. So you're going to go with the music service that provides the least advertisements, the best content, and the lowest subscription.

  4. Pandora's management is not on the same tier as Apple's was. This is subjective. Please, judge for yourself.

  5. Pandora's product isn't particulary good. Again, subjective but very important.

Disclosure: I am short P.