Shares of Pandora Inc. (P) slide 7.7% ($2.62) to $31.39 on March 24, 2014 following news that Apple (AAPL) may start offering its iRadio (iTunes Radio) app for Google’s (GOOG) Android users.
Apple’s move is widely seen as measure to check market share slide of iRadio, which faces significant competition from Pandora. Reportedly, Apple is also pondering to offer a subscription based on-demand music service, as song download from its iTunes store continues to decline.
iRadio’s availability for Android users will not only expand Apple’s footprint but also eat into Pandora’s market share growth. In the recently concluded fourth quarter, Pandora’s listener-hour increased 16.0% year over year, which declined from 17.0% and 18.0% growth reported in the previous two quarters, respectively.
Recently, rising cost of licensing music forced Pandora to increase ad-free subscription by $1.00 to $4.99 per month. Over the last five years, royalties to artists have increased 53.0% and is expected to go up another 9.0% in 2015.
Per the new subscription plan, yearly subscribers will now move to a monthly $3.99 loyalty plan once their current $36.00 membership expires. Pandora claimed that only 3.3 million users out of a total of 250 million will be affected by the price hike.
However, this new plan would add up to an amount much higher than what existing members had been paying so far, which may result in a higher churn rate in the near term. In such a scenario, Apple’s diversification move will be an additional headwind for Pandora, going forward.
Nevertheless, we believe Pandora’s popular service, driven by its effective discovery engine and a well-established infrastructure, places it well to compete against the likes of Apple, Spotify and Sirius XM (SIRI). Moreover, improving monetization and strong mobile growth are the long-term positives.
Currently, Pandora has a Zacks Rank #3 (Hold).
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