Companies To Watch As The Future Unfolds In Streaming Audio

CHRIS LAU, KAPITALL: When Google (GOOG) announced during its I/O 2013 conference that it will offer streaming audio for $9.99 per month, it further validated online streaming as being the future for consuming music. The move was necessary for Google. The consumption of music on YouTube declines as the user’s age rises. To gain a music audience for the older age group, Google needed more than YouTube:

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Investors already anticipated this. Pandora (P shares are trading well-above its IPO price of $10, closing recently at $16.48. Even though the music service was already rumored back in February, 2013, investors are not concerned with the extra competition from the search giant:

Another reason investors are not fearful of Google is that Google introduced a music service at the I/O 2011 event. At the time, the service only allowed users to store 20,000 songs. Dubbed All Access, Google launched the music service in the United States. Google reportedly managed to reach a deal with Universal, Sony (SNE), and Warner Music.

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In early May, Pandora signed on Tommy Page as VP of Artist and Brand Partnerships. Page was a publisher for Billboard. It is expected that the hiring will help Pandora differentiate itself, as the company could focus on original content. This would be achieved by branding the content, streaming live events, and expanding artist development programming.

Spotify and Pandora do not need to worry about Google. They entered the streaming music sector well-before Google did. Furthermore, Google does not have any access to exclusives. For its monthly price, Google is not offering a better deal than anyone else. After the initial trial ends, users may not renew the music service.

Other reasons All Play could stumble is that there is no support for iOS, no information on the quality of the streams, and no airplay support.

Risk Analysis for Incumbents

Shareholders of Pandora should not brush off Google just yet. For now, the service is only available in the U.S., but Google could expand to the rest of the world. Google’s All Access could also make better music selections than Spotify. If Google’s algorithm does a better job in anticipating the type of music users would like, then the incumbents will need to improve their offering.  

Apple and Microsoft

Google’s All Play could prove troubling for Microsoft’s (MSFT) Xbox Music Pass as users give the new player a try. For Apple (AAPL), the company has yet to release iRadio. Apple is reportedly having trouble signing on BMG. Sony already reportedly rejected Apple’s licensing terms. The negotiation troubles are putting Apple further behind on the streaming audio front. This will give Pandora, Spotify, and Microsoft, now Google a chance to move ahead.

Conclusion

Investors should not underestimate the entry of Google in streaming music. Users ( postings on the Verge) are already reporting that the radio playlist and the usability are very good. Killer features include the ability to skip songs an unlimited number of times (unlike with Pandora) and downloading the album on device to allow for offline listening. Pandora and Spotify will need to respond by offering the same thing, and much more. This will increase operational costs, and notably R&D costs. In the end, consumers win, but investors of Pandora shares should be cautious.

Written by Chris Lau

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