Pandora Media Inc (NYSE:P) is getting ready to release its latest earnings report this week. As the market waits for what could be stellar results, players may be wondering how the entry of Google Inc (NASDAQ:GOOG) into the Internet radio service space will affect future earnings for the pioneering Pandora Media Inc (NYSE:P).
Google and the others…
At its developers’ conference last week, Google Inc (NASDAQ:GOOG) announced it was launching an online radio service. It’s priced at $7.99 a month (before June 30, when it rises to $9.99 a month). This is higher than Pandora’s $3.99 per month.
Pandora’s audience has grown to an estimated 200 million registered users since it snagged its first one in the summer of 2005. These users should retain some degree of loyalty to Pandora, and I doubt that a significant number of them would jump ship to Google Inc (NASDAQ:GOOG)’s music service, especially when the latter’s higher price is factored in.
Also, Pandora has managed to hold its own in the face of several other major players, including Amazon, Apple, Microsoft and Sony. Unlike these others, Pandora’s service isn’t part of some larger plan to draw listeners to other brands in its corporate ecosystem – all in the name of driving advertising revenues up.
And Then There’s Apple…
Still, the next largest threat may be from Apple Inc. (NASDAQ:AAPL). It already has a significant following from iTunes, and the rumor mill continues to spin that Apple Inc. (NASDAQ:AAPL) will launch its own radio service — but that its efforts have been hampered by licensing disputes.
Fool writer Daniel Sparks wrote last month about a rumor that Apple is working on a streaming music service, dubbed iRadio. Sparks pointed out that iTunes dominated the digital music download market last year. Its fourth-quarter market share came in at 63%, according to NDP, down from 66% in 2010. Much of Apple’s decline was Amazon.com, Inc. (NASDAQ:AMZN)‘s gain; the latter company’s market share rose from 13% to 22% in the same period.
Not Wasting Advertisers’ Time
The success of Internet companies these days hinges on their ability to monetize their mobile users, since more people are choosing to go online on their smartphones and tablets, instead of via desktop and laptop computers.
Pandora is positioning itself to compete not with a rival streaming service, but with its biggest competition: broadcast radio. Earlier this spring, Pandora announced that its audience data will appear in the three most popular media buying platforms, which allow advertisers to compare audience ratings.
Previously, only traditional broadcast radio stations used these platforms. But advertisers trying to figure out which outlet will yield them the biggest bang for their buck can now see Pandora’s data, too. Until now, Pandora had to hope that advertisers would manually research its national and local audience ratings.
Considering that more than $14 billion is spent on spot radio advertising every year, according to the Radio Advertising Bureau, any effort to tap more of this market matters to Pandora.
Putting Down Its Foot
As Pandora gains more users, its costs to stream music are outstripping the revenues it reaps from advertising sales. In fact, the company reported that its per-track royalty rates have increased more than 25% over the last three years, including 9% in 2013 alone. They are scheduled to increase an additional 16% over the next two years.
To mitigate these costs, the company took the unusual step of limiting its users to 40 hours of music a month. This “allows us to manage these escalating costs with minimal listener disruption,” the company noted in a blog post in February.
I like this limit. It shows that Pandora is bold enough to take the needed steps to make sure its finances remain strong. Recognizing and immediately taking action will help it remain financially competitive in the long run.
It’s a Buy
Despite Google’s entry into its space, I still see Pandora as a buy. The company closed 2012 with a record 8% share of the total U.S. radio market, and it enjoyed record mobile monetization. I see no reason why that won’t continue.
For the first quarter of 2013, Pandora is expected to post an earnings per share loss of $.10 compared to the EPS loss of $.09 the company posted during the first quarter of 2012. Don’t frown too much about that projected loss. Pandora execs say the company is the largest radio station in almost every major market, and it will begin fiscal year 2014 with “extraordinary momentum.”
The article Will Google Threaten This Pioneering Radio Service Giant? originally appeared on Fool.com.
Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Chevron.
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