Apple Music Spooks Pandora Investors as Stock Continues Drop

NEW YORK (TheStreet) -- Apple's (AAPL) entrance into music streaming is unlikely to sink Pandora (P), but investors still have doubts.

On Tuesday, the largest Internet-based radio platform fell 3.1% to close at $17.51, extending its two-day slide to 6.8%.

Apple announced to much fanfare on Monday that it will start a subscription-based streaming service at the end of this month. Unlike Pandora, which is largely advertising-based, Apple Music will require a $10 per month subscription though it is offering a family rate for up to six people of $15 per month.

"I think the market always fears this competition, though it should come to no one's surprise that Apple is doing this," said Amy Yong, an analyst at Macquarie Group Limited.

Following Apple's announcement, Pandora founder Tim Westergren took a defiant tone, saying that business at the online radio service is growing despite "countless 'Pandora killers.'"

"It's increasingly clear that personalized radio is the future, and building a great personalized radio product is fantastically hard to do," Westergren said in an emailed statement. "As we've seen for years, new products attract trial users, but the real question is sustained attention."

Since 2013, according to Pandora, listener hours are up 25% and its share of radio listening market has grown to 10% from 8.6%.

Indeed, listener hours at the Internet streaming service grew to 5.3 billion in the quarter ended March 31 from 4.8 billion in the same period a year earlier. While Pandora's revenue in the quarter increased 19% to $230 million, the company remains tiny compared to Apple, which reported sales of $58 billion for the three months. 

But Pandora executives remain steadfast that its ad-based model will endure because consumers have come to expect that listening to music, whether on terrestrial radio or Google's (GOOG) (GOOGL) YouTube, is free. Finance chief Michael Herring, speaking on CNBC, said listeners have come to embrace Pandora's customized radio stations that evolve based on their past listening habits.

"We lead the industry in terms of ad-supported radio," Herring said in the CNBC interview. "We think that that's going to be a competitive advantage for years to come."

Pandora listeners can ditch ads for $5 a month, but the company brings in most of its money from promotions between songs. First-quarter advertising revenue grew to $178.7 million, up 27% year-over-year. Mobile advertising made up 78% of that figure.

Another area of growth for Pandora is local advertising, which grew 67% compared to a year before. Like terrestrial radio before it, 138 Pandora representatives currently sell ads to local car dealers, hospitals, universities, and retailers in 38 markets around the country.

Since users volunteer their age, gender and zip code when they sign up, Pandora can specifically target ads for them.

Despite growth in ad revenue and total revenue, Pandora's total net income loss deepened 67% year-over-year in the first quarter. Royalty payments remain the single largest item on the liabilities side of its balance sheet.

Rather than rely on advertising, Apple Music will charge individual users $10 a month for subscriptions. It also offers on-demand listening in addition to a 24/7 radio station curated by veteran DJs and other features.

Because Pandora and Apple follow such different business, Yong says there's "enough room" for Pandora and Apple to each get a share of streaming. 

Apple will compete more directly with Spotify, she said, which offers free, ad-supported streaming and a $10-a-month paid subscription plan.

The question now is whether new Apple subscribers sampling the service for the first time will "lean in" to listen -- paying the subscription fee and selecting specific songs they want to hear -- or will soon "lean back" to Pandora's hit-play-and-forget-it listening model.

On CNBC, Herring said Pandora's research shows that the bigger opportunity is in ad-supported streaming, noting, "80% of Americans are not going to pay...for a $9.99 a month subscription."

Pandora stock and listenership have proven resilient to Apple's chess games in the streaming music space before. In June 2013, Pandora stock barely dipped and then quickly recovered in anticipation of the iTunes Radio announcement that month.

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