Pandora Trash Talks Apple, Is Google Ready to Back It Up?

NEW YORK (TheStreet) -- One thing I've learned about consensus in the tech and financial media is that it tends to lag reality by about six months to a year. The idea that Apple's (AAPL) acquisition of Beats will hurt Spotify, but not Pandora (P) provides a nice case in point.

There's no doubt Pandora -- as lean-back and passive pure-play streaming radio -- is distinct from on-demand skewing Spotify. In fact, that's one of the points I made throughout 2011, 2012 and much of 2013 to build the ultimately accurate bull case for Pandora (P shares soared 52.7% from their IPO to the end of 2013). But things change, particularly in a space as dynamic as streaming media operated, largely, by technology companies.

You can't stand still. You can't assume that what was true in the past holds in the present and will remain static into the future, no matter how righteous you think it is. As it continues to stand still, Pandora runs the risk of falling victim to this mindset.

There's a core problem at Pandora: The folks in charge, led by the spirit of co-founder and former Chief Strategy Officer Tim Westergren, believe Pandora can replicate past success by focusing almost solely on what triggered that success. That's the tag team of personalized radio, powered by the fantastic Music Genome Project, and the sale of targeted ads purchased by the same folks who make up broadcast radio's $15 billion advertising market. While there's no reason for Pandora to ditch that strategy, every reason in the world exists to move beyond it.

Pandora is on record as saying the Apple/Beats combo isn't a threat. With that, they have never been more delusional. Because the CEO can't seem to speak on behalf of his own company, it was Pandora's CFO, Mike Herring, who made the misguided Apple isn't a threat comments at a recent investment conference:

Apple learned that as well coincidently with a launch of iTunes Radio again, much height, much anticipated launch of this radio service last September, we did see a slight drop in user from that and since it recovered and continued to grow ...
... iTunes Radio learned it the hard way that no matter how much muscle and hype you put behind something ... it's pretty hard to build market share.

That's not only pompous and condescending, it's the poster child for living in the past. Herring must have been too busy counting his millions (he, too, qualifies as a filthy rich Pandora executive; just see this). How else could he have missed the forward-looking statement Tim Cook made in the Beats press release:

Music is such an important part of all of our lives and holds a special place within our hearts at Apple ... Thats why we have kept investing in music and are bringing together these extraordinary teams so we can continue to create the most innovative music products and services in the world.

So to answer the question What's Next for Pandora? ...

As an independent company, nothing. Nothing is next for Pandora other than a boring, if not meager existence.

To be clear, There's no way Pandora can continue as an independent company. When Apple says, in no uncertain terms, that it intends to corner every aspect of the digital music market -- from downloads to free streaming radio to on-demand subscriptions -- it's obvious the game has changed. The answer that worked for Pandora previously no longer applies.

As the digital music landscape matures, it stops mattering that Pandora is distinct from Spotify. The argument that Apple failed (initially) with iTunes Radio and isn't competing directly with Pandora (it is) ceases to be relevant. The correct answer from Pandora to the Apple/Beats question should have been something with more humility like: What it comes down to for us is ... do we deliver ROI for our advertising clients? If we do, we can continue to build that business. But there's no question -- Apple has its sights set on digital music and, as such, we need to step up our game.

In other words, conduct yourself like the classy Miami Heat, San Antonio Spurs and Oklahoma City Thunder, not like the trash-talking Lance Stephenson of the Indiana Pacers. Because as Stephenson proved with his equally-as-delusional needling of LeBron James, when you say and do the wrong thing in business against the big boys it often comes back to bite you.

All of that said, Pandora management isn't stupid. I know these guys. For as arrogant as they appear (and, to some extent, are), internally they are taking this seriously. If they're not, things are more wheels off at Pandora than I originally thought. 

The future of Pandora as a going concern hinges on the decision they will have to make before the end of 2014, if not immediately. Do we try to go at it alone or do we set our egos aside, swallow our pride and, much like Beats did, ask for some help?

For as hard as I have been on Pandora lately (and right, as the stock's off more than 30% since I took my bearish turn), I have confidence, particularly in Westergren, to make the right choice. While he might be stubborn, it would also kill the guy to see what he and Pandora's first round or two of employees built crumble. Westergren must see the writing on the wall. And it leads, in indelible ink, to Google (GOOG) (or, possibly, Yahoo! (YHOO)).

One thing Herring said that actually made sense was, and I'm paraphrasing ... Apple's really looking to compete with Google. Most everything he said around that was wrong, namely the slippery slope that because Apple's going after Google, it can't possibly impact Pandora. But he was correct that Apple is now more serious than ever about hammering Google. I have written about it extensively. And that's exactly why it's high time for Google to buy Pandora.

Pandora requires a savior. And Google could do incredible things with Pandora as it integrates the, for the time being, Internet radio leader into everything from a digital music ecosystem with the potential to compete with Apple to its search strategy.

I staked out exactly what a Google-Pandora marriage could look like back in early April. That article -- Google or Yahoo! Buying Pandora Makes a Ton of Sense -- is more relevant than ever. In fact, it's required reading to form an understanding of the digital music turf Apple and Google are set to dominate.

Pandora can only work in this mix if it agrees to let go of the past and step into a future where it drops the trash talk and gives itself more than a fighting chance to survive. Nobody should be trash talking Apple, but if anybody is going to, it sure as heck shouldn't be Pandora. Not now. Not ever. 

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

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Rocco Pendola is a full-time columnist for TheStreet. He lives in Santa Monica. Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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