Thursday, October 24, 2013

What Do Apple's iRadio Numbers Mean To Pandora?

On October 22, Apple (AAPL) unveiled the much anticipated new iPad, but more importantly for Pandora (P), preliminary numbers for iTunes Radio were also released. Tim Cook announced some 20 M iOS 7 users have listened to iTunes Radio and to 1B songs since inception. Considering iTunes Radio was launched just a month ago, I thought the numbers were impressive.
Many experts think Apple's new iRadio service is not intended to be a revenue driver, but rather more of a catalyst for users to ultimately buy more music from iTunes. Who knows, maybe iRadio will catalyze more social user engagement, much like Spotify promotes song and playlistsharing via Facebook (FB) and Twitter (TWTR).
Apple's ultimate intentions for iRadio are uncertain, but it's tough to deny the fact it could add a whole new dynamic to their ecosystem. A stickyuser experience is definitely worth the investment, since many would argue this engaging ecosystem is why consumers pay the premium they do for new devices.
Following Apple's Tuesday announcement, Pandora shares actually moved into positive territory in response. Admittedly, I was unsure how Pandora shares would react to an Apple announcement, so, perhaps, I luckily soldmy Pandora put options the day before the unveiling. Was the market's reaction justified? When Apple announced iRadio had 20 M listeners, my jaw dropped. Knowing Pandora had 72.7 M active listeners in September, I figured iRadio already has 25%+ the listeners Pandora has; but boy was I wrong.
Let's start off by using Cook's "1 B songs played" number. If we assume some songs were skipped over or cut short (as I do with Spotify by the way) we could go with 2-3 minutes per song as a rough number. That brings us to 2-3 B minutes, or about 33.3 M hours on the low end and 50 M hours on the high end.
Now compared to Pandora's Audience Metrics announcement of 1.36 B hours for September, we can now see why the stock rallied after hearing Apple's statistics. Apple's seemingly large 20 M listeners equaled just 50 M listener hours by my estimates, or just 3.6% of Pandora's 1.36 B hours. It turns out that all users are not created equal. Even more impressive perhaps was Pandora's ability to grow their listened hours number by 18% year-over-year, despite the iRadio launch. However, iRadio just launched and Pandora is many years perfected; so is it too early to tell?
Pandora still seems to be steadily increasing their user base and listening hours despite stiff competition from Apple and Spotify. More importantly, the stock seems to trade off of these statistics alone, and not so much in regards to profit. This is great for Pandora, considering content costs may not change until 2015 (covered here), and may leave them unable to make a reasonable profit until a change is made. Because of how the stock trades, if Pandora can continue to grow revenue, users, and listening hours in the face of Apple's ecosystem, the stock is going higher. Therefore, the true test for Pandora in the coming months is if Pandora is "stickier" than Apple's iRadio. What do you think?
Additional disclosure: I may go long or short P via options at any time. I have owned P put options in the past week.

No comments:

Blog Archive