Pandora Media, Inc. P recently closed the acquisition of leading online music analytics provider – Next Big Sound. The financial terms of the deal remain undisclosed.
The company had revealed its plans for this buyout in May 2015. However, in June, after tech bellwether Apple Inc. AAPL announced its plans to enter the music streaming market with Apple Music, Pandora shares started reacting to the increased competition instead. The company’s shares have dropped nearly 17% since Jun 8.
Apple Music was rolled out yesterday in over 100 countries and comes with a three-month free trial and thereafter, a subscription fee of $9.99 a month for individuals and $14.99 for a family of six for the whole of iTunes Library.
Synergies from Next Big Sound
The two companies have complementary assets. While Next Big Sound has sound analytics tools, Pandora can provide it with an immense reservoir of data from its 80 million monthly active users that have led to over 50 billion thumbs on tracks (a feature for gauging the likes of users) that were played.
Next Big Sound will offer all the critical insights on a single platform and also an advanced range of useful tools that are likely to add immense value to Pandora’s business. It will also broaden the range of data centric offerings on Pandora’s Artist Marketing Platform (AMP).
Utilizing the tools from Next Big Sound, Pandora will be able to quantify the impact of social media as well as marketing and promotional events on its sales. Furthermore, this acquisition can also add value to Pandora’s clients including artists, agents, managers, promoters, publishers, labels and even brands as they can use the insights to take marketing decisions.
This acquisition is also likely to open avenues for the company to monetize its platform going ahead.
Our Take
We believe that the digital music industry is in the middle of a revolution with increasing adoption of subscription services by users. As per the IFPI Digital Music Report 2015, subscription service revenues surged 39% in 2014 to $1.6 billion, representing about 23% of the total digital music market ($6.85 billion). The number of paid subscribers also rose phenomenally in the year, an increase of 46% to 41 million.
This has spurred competition with more and more players entering the field. Apart from Apple, Pandora also faces competition from other key music streaming service providers like Spotify.
At present, Pandora has an edge over both Spotify (60 million users) and Apple. Also, decades of experience in the industry has made Pandora reach its users across all possible media from smartphones to smartwatches and other modern devices. This gives the company a head start over its peers despite the smaller portfolio of music it offers. Additionally, the company has also kept its subscription rates more affordable at $4.99 per month. This acquisition will further allow it to cater more efficiently to its user demands and offer more targeted suggestions.
However, the presence of Apple and Spotify in the industry can pose concerns in the long run. We believe that Apple has entered the music industry market at an opportune time. Moreover, Apple has no dearth of resources to make its offering smarter and more user-friendly. On the other hand, Spotify has the largest number of free users, who are likely to remain loyal to the company, given its decent services, reasonable reach (across devices and regions) and connectivity with social media platforms like Facebook, Inc. FB.
While this acquisition will no doubt add to Pandora’s resources, it is still unclear whether it will be sufficient to offset the competition.
Pandora currently has a Zacks Rank #3 (Hold). Akamai Technologies, Inc. AKAM is a better-ranked stock in the space, with a Zacks Rank #2 (Buy).
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