How Can Pandora Save Itself?

The news hit like a one-two punch to Pandora's stock price: With rumors that Apple's considering the wide world of Internet radio, Pandora shares dropped just around 17 percent in a single day — not the best news for the company that, some 12 years after its founding, has yet to have a profitable quarter.

And while today's headlines give the impression that Pandora executives are taking to the airwaves to paint Apple as the biggest threat that the company faces, that's not entirely correct. For one, Pandora's not saying that; analysts are. Second, Pandora has itself (and its business model) to blame for putting itself in such a spot where Apple interest in the space would hit the company so hard.

And, third, all might not be entirely lost for Pandora.

We'll start with the quote. According to Reuters, Capstone Investments analyst Rory Maher said, "They are the biggest threat out there," in reference to Apple possibly moving into Pandora's space. The gist of the quote is probably pretty accurate, though Maher downplays Apple's influence with the rest of his sentence: "They have quite a bit of leverage through iTunes."

Or, as another analyst put it: "The 800-pound gorilla is pounding his chest, and people are starting to get nervous."

"Apple has big competitive advantages. It already has a big reputation in the music industry," added Richard Tullo, of Albert Fried & Co., in an interview with the Wall Street Journal.

But in many ways, Pandora's success thus far is its undoing. The more users tune into the service, the more Pandora has to cough up in royalties to allow its music streaming service to continue.

For example, Pandora spent $60.5 million on content acquisition last quarter, up from $33.7 million one year prior — representing 60 percent of the company's total quarterly revenue. However, the company also boosted its total user 48 percent within the same time period (between last quarter and a year prior) to a total of 54.9 million users. In total, Pandora's reported loss for the quarter — $5.4 million — was higher than the loss reported one year prior, $1.8 million.

So what can Pandora do? First off, concentrating more on the company's mobile advertising revenue — which made up nearly 60 percent of its total second-quarter advertising revenue — could prove successful, given that it's an area where Pandora has enjoyed more success than now-rival Apple. There's also Pandora's automotive tie-ins, although it's partnership with more than 18 car manufacturers, reports Reuters, isn't a lock-in for Pandora.

Car manufacturers like American Honda are allegedly remaining service-neutral and, worse for Pandora, are allegedly chatting with Apple to see just how the company might fit into the auto-audio mix going forward.

If Pandora somehow successfully convinces U.S. lawmakers to reduce music licensing rates, it could be a big feather in Pandora's cap as it pushes toward profitability. And, above all else, Pandora could also add more commercials and advertising to its services.

Unless, of course, the more than 400-plus million active iTunes accounts coupled with a less restrictive ability to listen to music become Apple's keys to the Web radio kingdom. Giving a huge, established user base the ability to stream songs they want to listen to in a friendlier fashion than even what Pandora offers could be just too compelling.

On the plus side, for Pandora, at least the company has months to scramble as Apple allegedly works to negotiate licensing and other streaming issues on its end.

 

For more tech tidbits from David Murphy, follow him on Facebook or Twitter (@thedavidmurphy).