Pandora Shouldn't Be So Worried About Apple's Streaming Service

NEW YORK (TheStreet) -- Apple (AAPL) is going to enter the music streaming business, and normally incumbents in any industry that Apple enters should be nervous.

But for Pandora (P), the customized radio service, and Spotify, the Swedish-owned on-demand streaming platform, Apple's entrance may not be reason for alarm.

The maker of the iPad and iPhone plans to introduce a subscription-based music streaming service as early as next week, The Wall Street Journal reported on Tuesday. The $10 per month service is intended in part to compensate for declining revenue at iTunes, the music download platform that catapulted Apple into the world's largest music retailer. Revenue from services that includes iTunes, the App Store and iBooks, was $4.9 billion in the quarter ended March 30.

But unlike its entrance into laptops and smartphones, Apple may find it harder to dominate music streaming, said Paul Verna, a media analyst at eMarketer.

Pandora and Spotify, the world's largest music streaming services, already have millions of listeners, and their basic offerings are free. Active Pandora listeners climbed to 79.2 million in the first quarter while privately-held Spotify began the year with 60 million worldwide users. Apple, though, only plans to make a limited number of song available for free. Apple's service will be largely  subscription-based, a stark contrast to their rivals which get only a fraction of their revenue from monthly subscribers.

"A lot of what has allowed Pandora and Spotify to flourish, particularly in the U.S., has been this ad-supported tier," Verna said. "What Apple appears to be planning asks a lot more of the consumer who is already spread thin by all sorts of content services that are trying to charge a subscription."

Shares of Oakland-based Pandora were gaining 0.7% to $18.55, extending its three-month advance to 22%.

Pandora has continued to increase revenue even as the company remains unprofitable. Sales in the first quarter rose 19% to $230.8 million as loses totaled $25 million. Listener hours climbed to 5.3 billion from 4.8 billion a year earlier.

"We're relentlessly focused on extending our leadership position and making the Pandora listening experience even better for our loyal following of nearly 80 million active monthly listeners," a Pandora spokesperson said in an e-mailed statement. "Apple's investment in this category reinforces our long-held belief that there is healthy consumer demand for digital music services."

And healthy may translate into free. The notion that music streaming shouldn't require a subscription is reinforced by Google's (GOOG) YouTube. YouTube doesn't reveal the number of music streaming listeners on its platform, but Verna says it has become "a huge part of this market."

Unlike Apple, Google is more than comfortable selling advertising around music streaming on YouTube. Apple has long stayed clear of becoming an advertising platform. "It's just not in their DNA," Verna added.

Spotify is more likely than Pandora to lose market share because of Apple's streaming service. Apple's subscription service also appears to be an on-demand streaming platform rather than a personalized radio service whereby Pandora chooses songs based on a users initial selection.

That streaming music is rising is indisputable. The percentage of smartphone users who stream music is expected to rise to 56% by 2019 from 52% in 2015, according to eMarketer. Tablet users who stream music are also expected to reach 50% by 2019.

Apple's advantages are that the company is very good at making things. Consumers have come to expect high quality from whatever hardware Apple makes or mobile application that it creates. Apple also has a loyal customer base of its own. Sales of the iPhone surged 40% in the first quarter to 61 million as revenue rose 27% to $58 billion. 

Apple is betting that its music streaming service can capitalize on its reach, and potentially offer consumers a mobile experience that transcends those offered by Pandora and Spotify. It could also bolster sales at iTunes, which accounts for roughly 80% to 85% of music downloads world-wide, according to The Journal, which cited music industry sources.

But not everything Apple has touched has turned to gold -- iTunes Radio, which began in 2013, was intended to help offset the decline in iTunes downloads. The service has struggled to gain traction, accounting for 7% of the market, according to eMarketer. Pandora is the leader, holding 27% of the market as of February, along with iHeartRadio (IHRT) and Spotify, each at 7%, respectively.

"Apple is late to the game," Verna said. "If they had done something like iTunes Radio five years ago, or an on-demand streaming service three or four years ago, then they could have owned those spaces. But they didn't. And these companies -- Pandora and Spotify -- have a lot of experience, a lot of traction, a lot of customer loyalty."

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