Some call it a battle of "good vs. evil," where Apple is coming to demolish Pandora, "the innocent bystander." First, Pandora is in business as a public company, not as charity, but because it wants to make money. To that end, every competitive rule in a capitalistic playing field applies.
Unfortunately, making money has not been something that Pandora has shown a propensity to do. And it's not going start now. This is despite having more than 7% of the radio market share. And now, with Google's (GOOG) All Access service fully in the mix and Apple's iRadio soon to follow, Pandora will have to work harder to secure a meaningful chunk of the $4 billion per year U.S. mobile-ad market. But it's slipping away. Now, investors are beginning to panic - as they should -- because things for Pandora will likely get worse.
Here's the problem; Pandora needs music to survive -- Apple doesn't. Apple sees music streaming as nothing more than a strategic way to advance its capabilities in services and mobile advertising. And if the company is able to leverage and monetize its half-billion user base, it's a good move. But in doing so, it removes leverage from Pandora against advertisers.
What's more, given the fact that Pandora is already struggling with rising royalty costs, the company will get squeezed out quickly. Many Pandora bulls insist that the company's Music Genome Project will continue to set the company apart. "Apart" from what? There are several other platforms that are just as effective in music discovery -- Apple's iRadio, which will allow users to set their preferences, will likely take the MGP-like feature to another level.
Consider this. In 2012, Pandora reported average revenue per user of $4.42, when adjusting out ad revenue. Even though this figure pales on comparison to a subscription model like Sirius XM (SIRI), which generates ARPU of $12.05, I'm willing to give Pandora some credit here for having grown that figure in a non-subscription dependent model. Unfortunately, though, this performance has never trickled down to the bottom line, where it matters the most.
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