One Area Where Apple Will 'Crush' Pandora

NEW YORK ( TheStreet) -- Tuesday morning at TheStreet, Chris Ciaccia told us about Apple's ( AAPL) plans to expand iTunes Radio internationally.

Makes sense for several reasons, particularly the ones Chris brings up. It's also something Pandora ( P) probably could do (if it really wanted to), but, in all likelihood will not and absolutely should not do. At least not right now.

Some key points on this:
  • Outside of the U.S., Pandora only exists in Australia and New Zealand.
  • From what I understand, Pandora only exists Down Under because it secured an attractive royalty deal. While the company pays more than half of revenue for content costs domestically, the number in Australia and NZ is closer to 20% or 25%.
  • Unless something changes dramatically, don't expect Pandora to expand overseas unless it can sign royalty arrangements that look more like the one Down Under and less like the present structure in the U.S.
  • Apple can afford to pay whatever it takes to expand internationally. The cost amounts to rounding error on the company's balance sheet. Plus it can leverage its brand and existing cachet to cut deals. All Apple cares about is penetration. The more countries iTunes Radio is in, the more real the possibility it can sell mobile devices there.

History is littered with companies that attempted to implement ill-advised expansion plans too quickly. Webvan is a fine domestic example. At the moment, Netflix ( NFLX) continues with an international expansion that will be one of the factors responsible for its eventual collapse.

It's one thing to be in go-go growth mode. It's entirely another to put carts before horses, to play with investors' money like it fell out of an old Monopoly box. That's what Netflix is doing as it spends way beyond its means. It's not even stretching itself. Netflix is setting itself up for another cash raise, emergency corporate bailout or, worse, insolvency.

That's where Pandora's smart and focused management shines. Though not to the same degree, outgoing Pandora CEO Joe Kennedy and Co-Founder/Chief Strategy Officer Tim Westergren are getting rich on stock options just like Netflix CEO Reed Hastings and CCO Ted Sarandos are. But they're not drunk on the power that wealth brings. They're growing quickly, yet responsibly.

Like Netflix, Pandora could make a show of it and overspend to enter Northern Europe or the UK. But what's the net effect? Cool-looking headlines, spiffy press releases and, potentially, an artificial bump in the company's stock price.

Nice way to pad the pockets and appear competitive short-term. Great way to blow up the business long-term.

Unless something changes materially to ease Pandora's cost structure with respect to royalties, don't expect the company to compete much, if at all, with Apple overseas. It has resisted any urge to do so with Spotify for quite some time. In Pandora's recent secondary offering notice, it did not mention international expansion as a one way it might spend the extra cash. That's, more than likely, the truth.

-- Written by Rocco Pendola in New York City
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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