Despite the rebound in its stock back above $12, Pandora (NYSE:P) continues to suffer from a relentless drumbeat of doom. Articles like this one, where "left in the cold" is about the gentlest language used, are common. Pandora, supposedly, just cannot compete with the flood of rich new competitors pouring into the streaming radio space. The acquisition of Rdio's on-demand service is commonly seen as a sort of final Hail Mary.
But many, including Pandora's own major shareholder Corvex Management, simply want the company to sell as fast as possible, before any more bad news arrives. Some have even taken to positing certain similarities between Pandora and LinkedIn (LNKD) in order to push the argument that now is as good a time as any for the company to sell and cash out.
I am taking the contrary view. While Pandora is not without challenges, those mostly pertain to its content costs, just as they have for years. Pandora actually has little to fear from its new competitors.
New Kids On The Block
Almost a year ago to the day, Spotify (Private:MUSIC) declared that it had reached the 20 million subscriber mark for its ad-free premium service, just as Apple (NASDAQ:AAPL) was preparing to unveil the new Apple Music streaming service it had announced to the world. Amazon (NASDAQ:AMZN) Prime Music was approaching its one-year anniversary, and Pandora looked to be on the rocks as seemingly every tech giant with deep pockets was gunning for it. It's share of radio listening, which had peaked at 10%, was beginning to fall.
One year later, things might appear to be even worse. Spotify is now at 30 million subscribers, and Apple Music is at 15 million in just one year. Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Youtube Red has joined the fray, and Amazon is reportedly mulling expanding its offerings.
Look closer, though, and there are some positive signs. First, after falling, Pandora's radio listening share actually started recovering following the launch of Apple Music, back to 10% at the end of last year. Second, a recent decision of the Copyright Board set royalty rates, the company's biggest expense, at a more favorable rate. And third, most of the "Pandora-killers" out there turned out not to be gunning for Pandora at all, at least not for the heart of the company.
Apples And Oranges
Pandora has long been the quintessential Internet Radio stock. This is slightly different from most of the other services out there today, including Apple Music and YouTube Red, which all offer ad-free, music on-demand models. Pandora, meanwhile, even in its paid subscription offering, does not let users choose which songs they will hear. Rather, they select songs for them based on user feedback, the now-famous thumbs up/thumbs down system. The only thing the subscription does is eliminate the ads. Rather than an effort to replace radio, Pandora is an effort to improve radio and bring it into the 21st century.
Despite all the admittedly outmoded practices it is saddled with and the controversy over its deplorable failure to pay artists fairly for their work, radio remains an important bastion of both cultural interaction and diffusion and cold-hearted capitalism. More people interact with radio every day (59%) than with the Internet, even in this day and age of smartphones and tablets. Among all mediums, only television has a higher engagement rate. Print newspapers, a truly dying industry, are all the way down at 13%.
I say print is truly dying because in traditional print, advertising is the lifeblood of the industry. And advertisers are leaving. The print ad category is the only major sector to see a pronounced fall in revenues, 8% in 2015. That trend is expected to continue, with print falling to just one-third of its 2007 level by 2018.
But the story in radio is far less grim. Because it is so interwoven into everyday life, radio remains an important sector for advertisers, even as they flee print and other non-TV/Radio traditional mediums for the digital sphere. Last year radio advertising totaled $17 billion. More importantly, it was still growing despite the proliferation of ad-free services. In fact, it grew faster than the TV sector did. Advertisers are sending a clear message: they've become rather indifferent to print's fate, but they don't want to lose radio.
Ensconced At The Top
Pandora is well-entrenched in this $17 billion space. It has more ad-based listeners than Spotify, the only other ad-based service out there, despite the fact that Spotify's service is global and Pandora is only available in the U.S. and ANZUS (Australia and New Zealand.) And despite the best efforts of all the major tech companies and their new services, freemium radio is not going away. Less than 20% of Pandora users would even consider paying for a streaming radio service.
If, as it appears, Apple and Google and Amazon all don't want any piece of the freemium radio market, and with Spotify so far behind, Pandora has a substantial customer base already locked in.
Pandora will continue to struggle with content costs, as it has for a long time now. But the recent decision should help ease those concerns. Meanwhile the tech giants supposed hammer blows are all falling more on each other than Pandora, as they battle for control of a market Pandora never had much traction in anyway.
With the lion's share of Pandora's business apparently of no interest to anyone else, Pandora has a strong base of loyal customers to build off of, a base no one else apparently even wants, at least not on the customers own terms. While a degree of caution is not unwarranted, given their high content expenses, there is really no more reason to be skeptical of Pandora now than there was before Apple Music launched, when Pandora was trading above $17, or before Apple announced its first results, when it was trading above $21. I remain bullish on Pandora.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in P over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.