Apple Music Threatens Spotify and Pandora

According to an IFPI report on the global music industry, the digital music industry is estimated to have grown 7% over the year to $6.9 billion in 2014. Digital music accounted for 46% of all global music sales. Another report by TechNavio estimates the digital music streaming market to grow 12% over the next four years. Given the high growth rates for the industry, it is little wonder that the giants are stepping into the game.

Pandora’s Financials
For now, online music streaming service provider Pandora (NYSE:P) seems to be successfully battling with these headwinds. Pandora recently reported their second quarter results which surpassed market expectations. Revenues for the quarter improved 30.5% over the year to $285.6 million, ahead of the Street’s forecast of $283 million. Loss per share of $0.08 was also better than the market’s projected loss of $0.11 per share. Adjusted EPS of $0.05 beat the market’s estimates of $0.02 for the quarter.

By segment, advertising revenues grew 30% to $230.9 million and subscription service and other revenues increased 31% to $54.6 million.

Among operating metrics, the company saw total listener hours grow 5% over the year to 5.3 billion with active users growing 4% to 79.4 million. Mobile listeners continued to grow and mobile revenues increased 37% over the year to $230.9 million.

For the current quarter, Pandora projected revenues of $310 million-$315 million, ahead of the market’s expectations of $309.2 million. Pandora expects to end the year with revenues of $1.18 billion-$1.19 billion.

Pandora’s Ad Offerings
Pandora continues to focus on driving their advertising revenues. Last month, they completed the beta testing of Sponsored Listening and made it available to all advertisers. The new ad format will allow users to listen to an hour of uninterrupted music by either watching an ad or interacting with an ad by viewing a slideshow. The ad formats have been tested with companies such as Land Rover, Gatorade, and Corona and with random listeners to impressive results. Pandora’s initial results suggest that users spending some real time with an ad have helped improve purchase intent for listeners by nearly 30%. Pandora is charging advertisers on a cost-per-engagement basis so that brands can pay for ads that are helping them deliver results.

During the quarter, they announced the acquisition of six-year-old startup Next Big Sound. Next Big Sound is known for their platform that helps in tracking the popularity of songs online and on social networks. It analyzes the popularity of music tracks and artists by following the activity on channels such as YouTube, Twitter, and Wikipedia and sells their analysis to record companies and media interested in tracking music consumption details. Terms of the deal were not disclosed.

Pandora’s Competition

The biggest news in the music industry was the recent release of Apple’s Music offering. Apple launched their music streaming service at the end of June, hence there was no impact on Pandora’s second quarter results. But the service could be hurt in the coming months. But Pandora’s management does not appear to be worried. During the call, when asked about their reaction to Apple’s move, they responded by saying:

“I think it’s really obviously very early days and with any big launch like this and the noise and things happening in the marketplace, there could be some listeners who experiment with the service and there could be some short-term impact, but we don’t –we aren’t seeing any meaningful listener impact at this time and we don’t expect any long-term meaningful impact either.”

Their stock is trading at $18.57 with a market capitalization of $3.94 billion. It touched a 52-week high of $28.96 in August last year and a 52-week low of $13.81 last month.

Spotify’s Offerings

Apple Music is not the only one giving Pandora a tough fight. Stockholm-based Spotify is also causing quite a ripple in the industry. Like Pandora, Spotify offers a free and a subscription-based music streaming service. Paid ad-free subscriptions cost $10 per month and families can pay $5 per additional user to the package. Earlier this year, they recorded over 75 million active subscribers of which nearly 20 million are paid subscribers. They have an inventory of more than 30 million songs and 1.5 billion playlists.

Spotify is also improving their curation capabilities. Till recently, they have relied on users sharing their playlists to create curated content for their service. But things are changing soon. Recently, they tied up with electronic music site Beatport to include the latter’s curated playlists. Beatport will also make additional curated playlists that will be available to Spotify’s listener base. Apple has invested heavily in getting talent within the music industry for their similar offering.

Spotify has seen strong revenue growth over the past years with revenues growing 45% over the year in 2014 to $1.3 billion. Losses increased from $68 million in 2013 to $197 million in 2014.

They have been venture funded so far with $1.1 billion in investments from Asset Management Partners, Baillie Gifford, D.E. Shaw & Co., Discovery Capital, Goldman Sachs, GSV Capital, Halcyon Asset Management, Lansdowne Partners, Northzone, Rinkelberg Capital, Senvest Capital, Technology Crossover Ventures, TeliaSonera, Alexandre Mars, AFSquare, Fidelity Ventures, Lakestar, The Coca-Cola Company, 137 Ventures, Accel Partners, DST Global, Kleiner Perkins Caufield & Byers, Founders Fund, Sean Parker, Horizons Ventures, and Li Ka-shing. Their last round of funding was held earlier this year when they raised $526 million at a valuation of $8.5 billion.

Apple’s Threat

Management comments aside, there is no denying that Apple will pose a big threat to any of the music streaming service providers. Unlike Pandora, Apple does not offer a free streaming service. As a promotion, they are currently offering a free 3-month subscription, but post the three months, access to the service will cost $10 per month. Apple believes that their listeners will be convinced enough to pay for this service. They are also offering a family package which will cost $15 for use by up to 6 members. Pandora beats Apple on the price considering that they charge $4.99 per user per month, but Spotify will find Apple’s family package a tough act to follow. Expect price wars to follow!