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TheStreet Open House

What Happens to Pandora and Spotify if Songza Goes Google?

NEW YORK (TheStreet) -- The New York Post attributed unnamed sources in a report that Google (GOOG) is in negotiations to buy streaming music service Songza, with a figure of $15 million being tossed around. The deal would follow on the purchase of Beats Electronics and its streaming service, Beats Music, by Apple (AAPL) and much talk about further consolidation in the space.

Should the Songza deal happen, it would definitely narrow the prospects for the two streaming music leaders, Pandora (P) and Spotify, leaving Yahoo! (YHOO) and Amazon (AMZN) as potential buyers for either one. Both Yahoo! and Amazon are likely feeling pressured to enter the streaming space. Perhaps either could afford the massive price tag that would certainly be required. But it's in the best interests of those streaming companies to remain independent as long as possible. They have largely defined the streaming music space on their own terms and will likely continue to do so, no matter who owns them. Apple buying Beats doesn't immediately threaten that leadership. Neither does the prospect of Google entering the space through Songza.

In Pandora's case, staying independent will probably require a merger or partnership with an overseas service like Deezer to build its brand beyond U.S. borders. An international presence is absolutely necessary for the company if it's going to remain competitive with Spotify. Pandora's share price has sunk from a high of more than $40 in March to a current $25.75, mostly on a lack of communication from its corporate offices about the direction of the company under its CEO Brian McAndrews, who took the helm last year. That's still considerably higher than $15, which is where investors were last year this time. The company has continued to grow market share and active users and the shares look poised to recover from here.

Apple and Google were clearly looking for a bargain. Apple put up $3.2 billion, but of that, only about $500 million is said to be specific to Beats Music; the rest was for the headphones and audio technology business of Beats Electronics. For that $500 million, the company got a strong, elite brand that aligns easily with Apple's, a subscription service to be an extra incentive for iTunes Radio customers and the creative input and celebrity status of Dr. Dre and Jimmy Iovine into the mix.

Google must feel it can build Songza's basic infrastructure. 5.5 million active users and known brand into a significant streaming music presence as an addition to its YouTube and Google Play services. In any case, neither Google nor Apple would seem to have a strong motivation to continue shopping in the space.

Pandora has a market cap of $5.25 billion. The Wall Street Journal last year estimated Spotify's worth at about $4 billion. Pandora claims 77 million users, Spotify has 24 million. (What constitutes an "active user" is a serious variable when considering these numbers and there is reason to believe the two companies calculate that number differently). Perhaps more important, while both companies rely on a "freemium" model, Spotify has more than 10 million paying subscribers, while Pandora has less than half that for its Pandora One product.

Spotify's greatest strength is its presence in more than 50 countries on several continents. It began based in Sweden and launched in several countries in Europe and has expanded from there, growing local audiences beyond language and cultural barriers. While it has a significant presence in the U.S., that international commitment puts the business at a distinct advantage as competition heats up here.

Pandora with its huge brand recognition and popularity in the U.S., should merge with Deezer. The French streaming service has a reported 5 million paying subscribers, all international. Pandora favors the continuous streaming radio format; Deezer prefers the more conventional on-demand playlist. The combination would give both companies business they need and likely yield possibilities for expansion in markets where they are already established.

Together they would make a formidable competitor to Spotify for the foreseeable future and hold on to the leadership in the space. No deal with Yahoo! or Amazon could offer that kind of clear potential.

>>Read More:

You Don't Know What Your Kids Are Listening To

How an Apple, Beats Deal Could Hurt Both Brands

Pandora Throws Investors for a Loop

-- Written by Carlton Wilkinson in New York

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