Apple’s iTunes Radio launches tomorrow, along with iOS 7. Interestingly, Pandora Media Inc (NYSE:P)‘s stock is hitting another all-time high today. Pandora Media Inc (NYSE:P) investors don’t seem worried about Apple Inc. (NASDAQ:AAPL)‘s Pandora-like music service one bit. But should they be?
iTunes Radio’s edge
In several ways, iTunes Radio has one-upped Pandora Media Inc (NYSE:P). While Pandora costs $36 per year for an ad-free subscription, an ad-free iTunes Radio subscription comes complimentary with an iTunes Match subscription, which costs $25 per year. Furthermore, the ad-free iTunes Radio lets listeners skip an unlimited number of songs. Pandora One subscribers can skip just six songs per hour. Finally, iTunes Radio will debut to the world’s largest digital store, which already boasts 575 million iTunes accounts linked to credit cards. Comparatively, Pandora Media Inc (NYSE:P) has only 3 million paying subscribers.
Pandora’s poor argument
Pandora Media Inc (NYSE:P) CEO Joe Kennedy’s arguments as to why the company isn’t worried about iTunes Radio are very weak.
“We’ve now been around for eight years. We’ve seen competitors large and small enter the market and, in some cases, exit the market … I’ve never seen an analysis that identifies an effect from any competitor … we don’t see the picture changing,” Kennedy told All Things D in regards to iTunes Radio.
But, Mr. Kennedy — you haven’t seen any competitor with Apple‘s clout compete in your space. So, 575 million credit cards, and the world’s largest digital music store, is a threat Pandora will be forced to acknowledge at some point.
Why Pandora is a gamble
But Apple Inc. (NASDAQ:AAPL)’s dominance in digital music is only a small part of the reason Pandora investors should be worried about iTunes Radio. Where Apple Inc. (NASDAQ:AAPL) is really stomping on Pandora is in the rates Apple is paying record labels. Beyond paying a higher figure per song than Pandora, Apple Inc. (NASDAQ:AAPL) is sharing a percentage of ad revenue with the record labels, according to the Wall Street Journal.
“Sharing ad revenue is precisely something that Pandora can’t do, since ads are its primary monetization strategy, explained Fool contributor Even Niu. “Advertising revenue was 84% of total sales last quarter, and content acquisition costs (i.e., royalties) were 79% of advertising revenue.”
Pandora Media Inc (NYSE:P) barely squeaked by with a profit last quarter, reporting just $0.04 per share. Sharing ad revenue, therefore, wouldn’t be easy. And Pandora’s financials don’t look like they will improve much in 2014, either. The company is guiding for non-GAAP EPS to be between breakeven and $0.05 per share.
With iTunes Radio’s launch finally here, Pandora is a risky bet. Before investors put their money on Pandora, they should give the company some time to prove how it will effectively compete with Apple Inc. (NASDAQ:AAPL).
The article iTunes Radio Launches Tomorrow… Should Pandora Investors Worry? originally appeared on Fool.com and is written by Daniel Sparks.
Fool contributor Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple.
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