SIRI), Pandora has not shown that it can make enough money to justify investors' faith. With Apple's ( AAPL) iPhones now available with iTunes Radio, which comes at a much cheaper cost than Pandora's subscription service, Pandora's already weak margins are suddenly under more pressure. Will the stock hold? FB), Pandora is also benefiting from a dominant showing in advertising revenue, which continues to outperform Street estimates, climbing up recently by 44%. But eventually "the music stops." Given that content acquisition costs continue to rise, including a 35% increase in the recent quarter, Pandora will have to do better than the $8 million GAAP (generally accepted accounting principles) loss the company posted in the recent quarter. Realizing that Pandora's dealing with liquidity issues in looking for ways to finance its operations, last week management announced plans to sell 18.2 million shares in an expanded stock offering at $25 per share. The offering, which is expected to close on Tuesday, is an attempt to attract advertisers away from terrestrial radio stations. Given how the offering was structured, which includes a 30-day option for underwriters JPMorgan Chase ( JPM) and Morgan Stanley ( MS) to purchase 2.73 million additional shares, Pandora might be able to net a total estimated sum of $393 million, given that the underwriters exercised their option on Friday. Investors cheered the news, sending shares of Pandora to its highest level in more than two years. But I wouldn't get carried away just yet. Assuming the local U.S. advertising market is a $15 billion industry, this seems like a good strategy for Pandora. Unfortunately, management has not shown that it can effectively monetize the 7.5% market it already owns of the U.S. radio audience. Plus, without knowing how Apple, which also plans to attract advertisers with iTunes Radio, will attack this market, Pandora may end up just throwing good money after bad, and diluting its own stock by as much as 9%.
I'm not saying Apple is just going to come in and kill off what Pandora has built. Worst case, I believe there's room for both to strive. As I've said, Pandora's death has been proclaimed by many companies and several music apps. It hasn't happened yet. The problem, though, is that with iTunes Radio, which comes free on iOS 7, Apple has essentially launched a competing service that is targeted at more than 50% of Pandora's listeners. Again, it's too early to say with any degree of certainty how viable iTunes Radio will be. But how long did it take for Microsoft's ( MSFT) Internet Explorer browser, which arrived free in every version of Windows, to kill off Netscape? This is where Apple's recent commercials, which have sent subtle messages to advertisers like "more people listen to their music on the iPhone than any other phone", becomes even more brilliant. In other words, it doesn't matter what the radio market share for Pandora or anyone else is, Apple is still the brand of choice. No other company has been able to monetize music better. Follow @saintssense This article was written by an independent contributor, separate from TheStreet's regular news coverage.