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Pandora Stock - The Day The Music Died

|Includes:Pandora Media (P)

"We now have had over 20 million users listening in on iTunes radio, and this number continues to grow. And they have been really active. They've listened to over a billion songs and this is just in the US in the last month. It is absolutely fantastic."

- Tim Cook talking about iTunes Radio on Oct 22 (watch Bloomberg video here)

The impact of iTunes Radio on Pandora cannot be underestimated as it has the potential to rapidly derail Pandora's growth prospects and even worse put Pandora back to where it was a year ago. Let's see why with some simple math.


Pandora had 72.7 million active users in September of which 29 million are estimated to be on iOS devices (Assumptions: 80% of Pandora users are Mobile of which half are iOS device users). I would assume the interest amongst 'iOS Pandora' users to try iTunes to be huge as they are concept positive towards internet radio and to iTunes. Say 50% of 29 million have already listened to iTunes music in the last month, that is 14.5 million users, i.e., 72.5% of iTunes Radio users in month 1 have come from 'iOS Pandora' users, a significant overlap. See my estimates illustrated in the two charts below.

Pandora - iOS Overlap EstimatesClick to enlarge


If 50% of month 1 'iOS Pandora' users switch to iTunes Music, that is already 7.25 million users, a loss of that base, a very realistic possibility, would put Pandora active listener count to 65.5 million, a number last seen almost a year ago.

Listening Hours:

iTunes Radio listeners have listened to over a billion songs in the last month. Assuming 223 seconds per song (thank you Google!!), that is 62 million listener hours in the month for iTunes Radio already. Given that internet radio usage has specific peak and trough timings, at a consumer level, this is a zero sum game. The gain of hours for iTunes Radio comes at the cost of someone else, and in this case, the market leader Pandora. iTunes radio has clear potential to dent Pandora listening hours significantly

Pandora Growth:

Pandora growth has already decelerated even without iTunes Radio. Sep 2013 yoy growth in users vs was 24.7%, half of the 49.5% yoy growth achieved in Sep 2012. Now with 20 million iTunes Radio users and growing, Pandora's growth could stall. Since Pandora users trying iTunes Radio would count as active users for both initially, listening hours is a more sensitive metric. We should expect to see an immediate impact on Pandora listening hours, and this impact will accelerate as iTunes Radio users customise the service to their needs. At minimum the share loss to iTunes will negate growth from non-iOS users, at worst, Pandora can see a decline in listening hours.


I suspect that Pandora will no longer get valuations if its top-line growth stalls. In order to justify current valuations, and using very favourable assumptions on expenses, I estimate Pandora would still need to grow top-line revenue at 30-40% next year. This is a high ask. At the first sign of flat growth/decline, this stock could easily go down to the mid-teens.


No matter what the music buff may say about the Music Genome Project and the superiority of Pandora's classification methodology, the fact is that most users will see iTunes Radio as an equally good product, albeit with easier access and a deep pocketed parent. Amazon gives away instant video to Prime customers who go there for the shipping benefits. Similarly, Apple can give away Pandora's entire revenue on iTunes Radio and not even notice it. And why shouldn't they if it helps them get greater engagement with customers and helps justify the premium price of their devices. I simply do not see Pandora surviving as a single product company in an environment where Apple could for example make iTunes Radio ad-free for all iOS users for a period of time. Better for Pandora to jump into the arms of a Google, Microsoft or Amazon or even an Alibaba-rich Yahoo now, than wait for them to pick up the pieces on the cheap a year later. This would give Pandora the best chance of succeeding in an environment that is about to get brutal.

Disclosure: I am short P.

Additional disclosure: I have bought puts on Pandora and will likely add to this position over the next few weeks. I am also long AAPL. I have made a number of assumptions in order to estimate the impact iTunes Radio can have on Pandora, and these are projections not facts.

Stocks: P