Apple (AAPL) again is generating a great deal of buzz in both the market and within the news media. The hype for the new iPhone has been sweeping across the market and proposed growth from this new product has helped fuel adjustments to current earnings estimates. These adjustments should help Apple continue to outperform the market while continuing to steal market share from competitors like Google (GOOG), Nokia (NOK), Microsoft Corporation (MSFT), and Amazon Inc. (AMZN).
It is easy to see that Apple has a great deal of growth potential in its phone market which makes up roughly 70% of its revenue. All of this iPhone hype has overshadowed a press release that Apple made two weeks ago stating that the company intends to set up a music streaming site similar to that of Pandora (P). If Apple did this it could be a serious game changer for Apple (as well for Pandora) and could generate a significant amount of revenue for the firm in the coming years.
Based on sales and usage rates many analysts believe that 40%-50% of Pandora users are already streaming music from an iOS device. For the purposes of this article let's assume that the 40% - 50% range is a fair estimate it would make sense that from the end user standpoint that moving from Pandora to Apple would be an easy transition. If Apple had its own service in conjunction with iTunes the amount of market share that Apple would be able to steal from Pandora could be significant, especially since it would just simply be easier for the end user to use. After the announcement, which really said very little, the market already began to discount Pandora for the perceived lost market share. The stock sold off almost 20% the next morning. If there is one thing that I have learned about Apple products and methodology over the years it is that its products love to make things easier and cleaner.
Details about how Apple would generate income off of this new streaming software is still up in the air, but I think it is safe to assume that the company would do something very similar to that of Pandora. This could be done in two ways; where a pay-for-service application was be available with unlimited steaming of music, or the more popular and free application which would limit music streaming time and would be in conjunction with advertising. Pandora has roughly 150 million registered users across iOS, PC, and Android based devices. This number does not take into account all of the unregistered users that use the free application each month.
Pandora's second quarter revenue toped $101.26 million, which was an increase from the year prior of 51.2%. The desire to have the ability to stream music on smartphones has increased significantly over the past 3 years and I think that can easily be seen in Pandora's annual revenue which has continued to grow at exponential rates. Estimates for Pandora's fourth quarter results are currently averaging $117.22 M with FY2013 revenue estimates coming in at $430 M.
· 2010 Revenue $55.18 M
· 2011 Revenue $137.76 M : 149% Increase
· 2012 Revenue (through July) $274.34 M: 99.1% Increase
The total market penetration in this sector is just beginning and Apple is now at the forefront to develop a new and innovative way to capitalize on it. With growth numbers like the ones I have outlined above it is easy to see why Apple wants to begin to take a share of this increasingly growing market. If Apple was able to capture 40% -50% of the current market from Pandora simply due to the number of iOS users currently registered, it would be safe to assume that Apple could generate somewhere between $156.6 M - $195.75 M in revenue, based on the 2012 numbers. Jumping out into the future where revenue estimates are pushing $614.5 M for F2014, Apple could generate somewhere $245.8 M - $307.25 M.
These numbers may sound small for a company that generated in 2011 revenue of $108 B, but these types of humble beginnings is exactly how both iTunes and the iPhone got started. If Apple is good at anything, it is good at taking something that already exists, making it much more user friendly, and giving it a huge profit margin.
There is always the big question of whether Apple would be successful in developing an application that generated similar revenue numbers and growth, but different enough to draw in the user base needed. This is a valid concern especially since Apple is more known for its products and not so much for its applications and software.
Pandora's business model is great for the end user, but the main problem with the software is that it does not allow for a great deal of artist and music flexibility. In Pandora's current application it will never play more than four songs from the same artist in a three hour period. In typical Apple fashion I would expect that the company would improve upon that limiting feature while seamlessly having iTunes available so that music could be purchased while streaming, among many other new and innovative ideas that Apple might have.
Apple revolutionized the music market with the advent of iTunes by allowing the end user to be able to buy individual songs from an album for just a $1 (now $1.29) and I have no doubt that again Apple will rise to the occasion and improve upon the current music streaming business as we know it, and make a ton of money in the process.
Disclosure: I am long AAPL.