There's Reason to Worry About Pandora

NEW YORK (TheStreet) -- It's a strange feeling.

Right when my long-standing position on Pandora ( P) receives the ultimate vindication -- even with the recent breather, the stock and company both continue to hum along -- I'm having critical second thoughts. I'm checking myself. I guess that's healthy and maybe even signals some sort of innate ability to know the company's fate long before it comes to fruition.

While it doesn't squash my overall bullish thesis, these seemingly impure and ill-timed thoughts might be worth considering whether you're an investor or an observer of the Internet radio space.

When the matter of competition in Internet radio comes up -- and Apple's ( AAPL) forthcoming iTunes Radio and Spotify enter the picture -- Pandora executives are quick to draw distinctions between the services. Important distinctions you must understand pursuant to any serious treatment of the matter.

Throughout my article history I address these differences many times in myriad ways.

They deal with the way each company pays performance royalties (Pandora uses compulsory licensing, while Apple and Spotify do direct deals with labels) and how they deliver music. The latter matters more in regards to the conversation over Pandora's long-term success.

Pandora claims that because it is radio -- you turn it on, it plays songs it thinks you like with the added elements of refined personalization and music discovery -- it is complementary to pretty much everything else that's out there that is not pure play radio. So, in Pandora's world, it is distinct from Spotify and iTunes (the music library) because both are primarily on-demand services.

But Pandora leaves out two important factors we must address.

Number one -- even a service such as Spotify and, most recently, Rdio, includes elements that are not purely on-demand. They allow users to create stations using personalization and discovery features that might not be as sophisticated as Pandora's Music Genome Project, but achieve the same or similar results. Leaving quality of experience aside -- which does matter -- this is important and often ignored when Pandora addresses the competition issue.

Number two -- Do music listeners really care about these distinctions? That's ultimately what matters. So, yes, in one breath I argue that these differences Pandora highlights do matter, but, in the next, I wonder if listeners care.

We're living through dynamic times. The way we consume music continues to evolve. Most importantly, people from pre-teens to the elderly are warming up to new ways to find, listen to and manipulate music.

Plenty of people, including me, still enjoy the basic elements of traditional radio, as redefined by Pandora. But the line between what is on-demand and what is pure play radio continues to get blurrier. As Apple enters the market (with what is pretty much the Pandora approach) and services such as Spotify and Rdio continue to add features, this distinction might lose much, if not all, of its relevancy.

Plus there is something to be said about the access model. I don't care what anybody says (particularly the always-interesting Glenn Peoples at Billboard), subscription services such as Spotify that offer access absolutely are the reason why music purchases -- physical or digital -- continue to crash, decline, stagnate or fail to impress. Why buy a single or a record when you can pay ten or so bucks a month and fire it up as many times as you like?

Does this mean Pandora gets killed? No way. Subscription services will likely continue to deal with a scale problem that Pandora doesn't have to worry about. Talk about competition -- the subscription space is loaded with it and continues to grow. It would be difficult enough to scale out to the point where you can sell advertising to the extent Pandora does on your own; in a crowded space, forget about it.

That said, it's worth keeping an eye on these distinctions and if they continue to matter as much as Pandora thinks they do. I'm concerned they'll matter less and less. If that's the case, Pandora cannot rest on its first-mover advantage. It needs to innovate both for the listener and independent artist it claims to serve. That's going to take better use of the data it collects and partnerships with startups presently reinventing nearly every aspect the music industry cares (or should care) about.

-- Written by Rocco Pendola in Santa Monica, Calif.

Rocco Pendola is a columnist and TheStreet's Director of Social Media. Pendola makes frequent appearances on national television networks such as CNN and CNBC as well as TheStreet TV. Whenever possible, Pendola uses hockey, Springsteen or Southern California references in his work. He lives in Santa Monica.

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