Pandora's Enemy at the Gates: Spotify Comes to the U.S.


With Spotify recently announcing that it will come to the U.S., Pandora ( P ) is going to see the battle over for music listeners intensify. In a previous article (see: Does the Facebook & Spotify Partnership Threaten Pandora? ) we noted that Spotify, which is not currently available in the U.S., could be a threat for Pandora as soon as the two were competing in the same market. Now Spotify is ready to draw first blood by coming to Pandora's shores and is partnering up with Facebook, which recently confirmed that it passed 750 million users.

The resulting competition for user listening hours can result in more than 10% downside risk to our already conservative estimates for Pandora's stock. Pandora is the leader in Internet radio and offers listeners personalized services based on preset choices and feedback. Apart from being available online, Pandora also has apps available on Apple's ( AAPL ) iPhone, Research in Motion's (NASDAQ:RIMM) BlackBerry and other smartphones operating on Google's (NASDAQ:GOOG) Android OS.

We currently have a price estimate of $10 for Pandora's stock , roughly 50% below the current market price.

Spotify unable to enlist Warner Music

Even though Spotify has secured licenses from three major record labels like Universal Music Group, EMI Group and Sony Music Entertainment, it reported that it has so far been unable to get the required licenses from Warner Music. ( (Spotify coming 'soon' to U.S., albeit no deal (yet) with Warner Music )) The absence of Warner's vast collection of music titles from Spotify's music catalog in the U.S. will likely hamper the services growth potential in the short-term.

Facebook partnership to make its content more social

Forbes reported that Facebook will soon launch a new music service with Spotify, which offers music streaming service and also allows users to sync their music and make purchases. It remains to be seen how effectively 'social music experience' offered by Spotify & Facebook will compete with 'personalized music experience', which is promised by Pandora. Nonetheless, we believe that through its Facebook partnership, Spotify will be able to compete with Pandora for user online music listening hours.

More than 10% downside for Pandora

In a scenario where Spotify competes successfully with Pandora for user listening hours, this could lead to a decline in monthly online (at home or work) listener hours and also lead to lower monthly mobile listener hours. If we adjusted both of these by 1 percentage point lower over our forecast horizon, this would imply around 10% downside from our present stock price estimate for Pandora, which is already well below the current market price.

You can drag the trend lines in the modifiable charts above to see the impact of these trends on Pandora's stock value.

See our complete analysis of Pandora stock .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AAPL , P



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