Yesterday, Pandora (NYSE: P) shares tanked on the news that Apple would be releasing iRadio, its long-awaited streaming music service in January of 2013.
While this is, of course, possible reason for concern, the reaction seems a bit overblown to me.
While Apple (AAPL) today is the 800 pound gorilla in digital music, it’s not clear to me that they will dominate streaming music for several reasons:
First, it’s not that easy. I’ve tested almost every music service out there and most are just not that good. I love Spotify, for the ability to play specific albums when I want, but when I want to pick a genre, not an artist, Pandora blows them away. I feel the same way about Apple Genius. It’s a convenient way to create an on-the-fly playlist when I’m at the gym, but the quality of their selections rarely matches Pandora.
Second, Apple’s track record at new things is spotty at best. Have we connected yet on Ping? Oh, that’s right, no one uses it. What about MobileMe? And how are you liking those new iOS maps? And while iTunes clearly revolutionized the digital music market, making it easy for novices to download legally, the interface feels dated today. Apple makes fantastic hardware. I am writing this on my MacBook Air and my iPhone and iPad are sitting on the desk alongside it. I love Apple hardware. But they haven’t yet proven that they can consistently deliver great apps or services.
Third is that this could certainly be a case where a rising tide lifts all boats. My daughter and I are big Pandora users, but my wife is not. Those who read this blog are likely pretty familiar with Pandora. But the mainstream user is not a Pandora user. If Apple puts its marketing muscle behind streaming music, that will do a lot to make it mainstream. And many of those new users will find their way to Pandora.
Last, and possibly most important is the existence of iTunes. iTunes today is an $8 Billion cash cow for Apple. Pandora set out to make the best possibly online radio offering and had no concerns of cannibalizing an existing product. Apple will have to carefully navigate the waters of cannibalization. Anyone who’s ever worked for a publisher knows how fears of cannibalizing the golden goose can drive companies to make dumb product decisions. Apple would prefer that streaming not exist, but it now has to enter the market to compete with Pandora, Spotify and others. In the perfect would, this new business unit would be given free run to create the best product on the market. But in reality, it will be constrained by not wanting to kill off an $8 billion cash cow.
Will Pandora withstand the entry of Apple? I think it will and could possibly thrive. With Apple behind it, streaming music will become a much larger business than it otherwise might. And if it continues to be the best product on the market, Pandora should receive a fair share of that business and grow much larger than it is today. And the downside risk is probably not very great. If Pandora struggles against Apple, there will be no shortage of suitors (Amazon, Facebook, Google) who would love to acquire them.