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Pandora Media Inc (P): Lowering Costs With WKRP In Cincinnati?

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Pandora Media Inc (NYSE:P) is buying a physical radio station, though not WKRP of sitcom fame. Can the Internet radio pioneer save itself by going back to the old way of doing things?

Opening the Box

Pandora Media Inc (NYSE:P) is probably the best known of the Internet “radio” stations, streaming personalized radio stations to its 200 million users. The company has a database of music that it has coded with markers that show how each song is interrelated. A customer puts in a song or artist that they like and then the database starts streaming music with similar markers.

Pandora Media Inc (NYSE:P)

The free version of Pandora Media Inc (NYSE:P) is supported by advertising. The music streamed to paid subscribers isn’t interrupted by ads. Although very similar to a regular radio station, it offers far more personalization. Pandora Media Inc (NYSE:P) offers both a desirable and technologically interesting service.

The Pressure is on

That said, there’s nothing special about streaming music, which is why me-too services have been popping up. Now, however, Pandora Media Inc (NYSE:P) faces a notable threat from Apple Inc. (NASDAQ:AAPL), which is launching iTunes Radio. Up until now, Internet radio stations largely had to be sought out, just like Pandora. With Apple Inc. (NASDAQ:AAPL) providing a native app for radio, many of Pandora’s customers are going to have an easy alternative already installed on their Apple devices.

For Apple, the allure is clear–it increases the company’s services and advertising revenue. That’s a more annuity-like stream of income and it shifts the company away from a reliance on bringing out hot new tech toys to support the top and bottom lines. Also it helps protect, and perhaps grow, the company’s online music sales since iTunes and iTunes Radio will be tightly connected.

Don’t look for iTunes Radio to change Apple Inc. (NASDAQ:AAPL)’s business when it finally gets launched later this year. However, it is an important step in the company’s transition from a fast growth to a more mature, and likely slower growth, entity. Still, with a solid top line, robust bottom line, and a share price still well off of its highs, Apple stock could be a good turnaround option. And the around 2.8% dividend yield and stock buyback plans pay investors to stick around.

Not Making Money

If Pandora Media Inc (NYSE:P) were profitable, the Apple threat would be less daunting. Although the company’s top line has grown each year, so too has the size of its loss. That’s not a sustainable trend. While iTunes Radio won’t put Pandora out of business, it certainly won’t help the money losing operation.

The purchase of KXMZ-FM in Rapid City South Dakota is an attempt to cut costs, or least keep them in check. Because Pandora is an online only service, it has to pay higher rates for the music it plays. That puts it at a competitive disadvantage to competitors who have both a physical presence and an online presence.

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