Watching Pandora stock’s meteoric rise to new highs, it’s clear something has gone wrong with the short thesis for at least the time being. The core of the bear case centered around a rapid rise in competition, which investors expected to result in pressure on Pandora to sustain its user base and market share. The belief that Pandora’s platform could be easily replicated and transformed into a commodity led many investors to place a short bet on the shares. However, the skepticism may have been misplaced. Pandora is a member of the Global X Social Media Index ETF (SOCL), which seeks to provide exposure to an index of social media stocks.
Competition fails to materialize
Competition did flow quickly into the online music streaming industry following Pandora’s success. Services like Spotify, iHeartRadio (owned by Clear Channel), TuneIn, and Songza jumped in with competing platforms. More recently, Apple introduced its own iRadio, while Google Play Music has arrived as well.
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Despite expected losses, the chart above shows that Pandora’s share of minutes streamed has remained surprisingly steady. Pandora’s success in defending its share can likely be attributed to several factors. First, the management executed well, using the first-mover advantage to solidify gains. In particular, the company embraced mobile and social platforms early with a mobile app launched in 2008 and early integration with Facebook. Today, estimates of Pandora’s mobile usage top 70%. Second, it’s possible that Pandora’s Music Genome Project, the database of songs with over 400 attributes applied to each, may be harder to replicate than investors initially realized. Without this data, the user experience that competitors provide may simply not be on par with Pandora.
The company’s apparent success at defending market share has at least temporarily undermined much of the bear case. However, with Apple’s iRadio launching only recently and considering the company’s resources, competition could still take a toll over time. But as we’ll discuss in the next part of this series, competition may not be very relevant to Pandora’s potential long-term success.