It was recently reported that Apple (AAPL) is talking to record labels and planning to launch a streaming radio service. Of course, Apple is no stranger to the music industry and digital music came to be sold the way we know today, because of Apple. But the streaming radio service has long been dominated by Pandora Radio (P). How will Apple's foray into streaming radio impact Pandora? How much does Apple have to gain, and how much does Pandora have to lose? Lets find out.
Of particular importance is Pandora, which became popular from 2007 onwards. The service is available only in the United States, with limited availability in New Zealand and Australia. It builds personalized radio stations by recommending artists similar to the ones they like. The moment Apple announced that it would introduce a competing Internet-radio service, Pandora's shares fell down by 17% to $10.47. Apple's shares as usual rose by 0.6% after the announcement, to $688.44.
So far, Pandora has remained the most popular music streaming service in the U.S. Moreover, 75% of online radio streaming usage is accounted by Pandora. It supports more than 650 devices and the company has some very lucrative deals with automakers, offering Pandora as a service embedded in vehicles' dashboards. Some of the existing competitors of Pandora are Spotify, Sirius XM Radio (SIRI), Clear Channel (CCO), Last.fm and Grooveshark. Spotify, Sirius XM Radio and Clear Channel are popular in the U.S. while Last.fm is popular in Europe and elsewhere. Grooveshark is popular among those who refuse to pay for streaming services but the company has run into several problems with record labels. Grooveshark also does not have an iOS application, which makes it less appealing to iPhone users who make up for a large part of the audience for music streaming. Last.fm, on the other hand, offers a social networking experience at $3 per month sans advertisements, and that has worked well for the company. Last.fm and Grooveshark are available worldwide, unlike Pandora and Spotify.
But, considering the American market, Pandora's only competitor so far has been Spotify, with other streaming services offering a less threatening competition. With this in mind, it is interesting to watch the way the market reacted the moment Apple announced that it is discussing its options with record labels with regard to launching a new online music streaming service. Apple as described earlier, is not a new entrant like Google (GOOG) to online music industry. Google Play music player is only available in the U.S. at the moment, but has not offered the kind of competition to Pandora that might seem threatening. Google also began to sell music on its Android Market and that too has not been able to match iTunes Stores standards in terms of sales. As far as selling of digital music is considered, Apple still runs the show and iTunes Store remains the most popular online destination to make music purchases.
Amazon (AMZN) launched its online music store in 2007 and was the first online music store to sell without digital rights management from major labels. It is available only in the U.S., U.K, Germany, France, Austria, Switzerland and Japan. Amazon MP3 has been rated positively, but many customers note that user experience is much better on iTunes Store.
Microsoft (MSFT) reported in June that it would launch a music streaming service similar to Spotify, called Xbox Music. Microsoft already offers Zune, which allows users to purchase music or stream unlimited radio stations which are customized. With this in mind, Apple does not really have a competitor when it comes to selling digital music online. iTunes Store remains the place-to-go when purchasing music online. But, Apple's recent decision to begin a music streaming service hints at efforts to monopolizing music business as well.
Apple clearly wants to dominate the music, and it can easily do that. Thanks to the popularity and success of iTunes Store, Apple's music streaming service or online radio will be immensely successful. I do not believe the content will be available worldwide. Apple will follow a path similar to Pandora and others in making the content available only in the U.S. Even if it makes music streaming available in other countries, I expect each country (U.K., Canada, France and other countries where Apple might feel the need to offer streaming services) to have its own radio streaming services.
Apple's market cap remains one of the strongest at $637.85 billion. With a profit margin of 26.97% and an operating margin of 35.62%, Apple certainly is the most important technology company in the world. The company's iPhone 5, with its rumored 4G LTE capability, NFC, and 4-inch screen will once again take the consumer market by storm. Apple also has total cash of $27.65 billion, which makes most investors drool. This is a company that is every investor's dream, and it always get things right. For music lovers and investors alike, the decision to launch a radio station online was a great one, and I hope the service is made available as soon as possible. By entering online music streaming industry, Apple will consolidate its music business and will effectively target the few competitors it still has. Apple is one of the few very large companies that do not have any debt at all. Apple's current ratio is 1.57, and its financial position will only grow stronger as iPhone 5 sees explosive growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.