Apple Internet Radio Entry Could Put Pandora in Play
Apple (AAPL) Inc.’s potential entry into Internet radio is poised to put online music pioneer Pandora Media Inc. (P) on the takeover wish lists of companies from Google Inc. and Amazon (AMZN).com Inc. to Clear Channel Communications Inc.
Pandora is projected to increase revenue by 214 percent in the next two years, almost triple the median for U.S. Internet media companies valued at more than $1 billion, according to data compiled by Bloomberg. With the shares down 34 percent since their initial public offering, a buyer could acquire a company trading for 21 percent less than the industry’s average price-to-sales ratio using next year’s forecasts, the data show.
Pandora sank 17 percent on Sept. 7 amid speculation iPhone maker Apple will introduce a rival service. Should Apple do so, that may compel Google (GOOG) or Amazon to snap up Pandora’s 150 million registered users to offer the service on mobile devices, Albert Fried & Co. and Needham & Co. said. Radio-station owner Clear Channel may be interested as listeners and advertisers shift to online media, according to Wedge Partners Corp. Needham says Pandora could fetch $14 a share in a takeover, a 32 percent premium, while Albert Fried sees the potential for a deal at about $20.
“When you look at the value of Pandora to another company, it’s the infrastructure they have created, it’s the advertising business, the success with mobile,” John Rudolph, a senior adviser at Santa Monica, California-based Internet and digital- media investment bank Siemer & Associates LLC, said in a telephone interview. “Pandora has such a big installed base and such a huge number of users, there’s value in that.”
Mollie Starr, a spokeswoman for Oakland, California-based Pandora, declined to comment on the potential for a takeover. So did Mary Osako of Seattle-based Amazon, Gina Weakley Johnson of Mountain View, California-based Google, and Wendy Goldberg of New York-based Clear Channel.
Today, Pandora shares ended unchanged at $10.58, after earlier rising as much as 4 percent.
Apple is considering the introduction of an online service that streams music based on users’ tastes, a product that would compete with Pandora, two people with knowledge of the plans said two weeks ago.
Steve Dowling, a spokesman for Cupertino, California-based Apple, declined to comment.
Pandora shares dropped to $10.47 on Sept. 7 from $12.57 the day before, the biggest loss since March, amid concern its growth would be hurt by Apple’s entry. Apple’s iTunes service had 64 percent of the U.S. digital music market and 29 percent of all retail music sales in the second quarter, according to data compiled by research firm NPD Group Inc.
Online and mobile radio are winning market share from traditional broadcasters. Pandora represents 74 percent of online-radio listening, and its share of all U.S. radio use has climbed to 6.3 percent from 3 percent a year ago, Dominic Paschel, the company’s vice president of corporate finance and investor relations, said Sept. 12 at an investor conference.
“That essentially makes us the largest station in most of the top 10” markets, he said. “We anticipate being the No. 1 radio station in pretty much all of the top 180 markets by the end of the year.”
Pandora, which offers both paid and advertising-supported services, also generates more revenue from mobile-device ads in the U.S. than every company except Google, according to data compiled by EMarketer Inc.
An acquirer would get a company projected to increase revenue to $861 million in the fiscal year ending in January 2015, up 214 percent from $274.3 million in fiscal 2012, according to analysts’ estimates compiled by Bloomberg. The median forecast rate for similar-sized U.S. Internet media companies is 73 percent.
The company is relatively inexpensive compared with its prospects. As of yesterday, Pandora’s enterprise value was 2.78 times projected sales in the next fiscal year, 21 percent less than the industry average, data compiled by Bloomberg show.
Apple’s entry into online radio could spur rivals such as Google and Amazon to step up their competing efforts by acquiring Pandora, according to Albert Fried’s Richard Tullo and Needham’s Laura Martin. Google is the developer of the Android software that runs smartphones produced by companies such as Samsung Electronics Co. Amazon makes Kindle e-readers and tablet computers. Apple could win as many as 20 million users for its radio service within a year, Tullo said.
“Because Apple is doing something, that makes everybody else want to counter their move,” Tullo, an analyst based in New York, said in a phone interview.
Tullo sees a buyer possibly paying about $20 a share for Pandora, which closed yesterday at $10.58. Martin, an analyst at Needham, sees a deal at $14. Tom Taulli, who analyzes acquisitions for Los Angeles-based IPOPlaybook.com, said Pandora could fetch $14 to $16. That would value the $1.79 billion company, which went public in June 2011, at at least $2.4 billion.
Google may wish to counter Apple’s efforts out of concern a new service would make iOS devices more attractive than tablets and smartphones based on Android, which Google develops to make money from mobile ads. To bolster its competitive stance, Google bought device maker Motorola Mobility Holdings Inc. for more than $12 billion this year. The company spent $750 million buying mobile-ad network AdMob Inc. in 2010.
Google could use Pandora to expand its offerings for computers, smartphones and tablets, Taulli said.
“They are trying to offer all the content and services to eke out more revenue per user,” he said. “The people at Pandora know how to make compelling services that people like and love. That kind of expertise is extremely valuable.”
Amazon updated its Kindle Fire tablets this quarter, and owning Pandora might help the retailer make the device more attractive to consumers, Taulli said. The company is also developing a smartphone, two people with knowledge of the matter said in July.
“You get critical mass overnight,” Martin said.
The online and mobile radio segment is growing faster than the rest of the radio industry, with revenue projected to more than double to $1.63 billion in 2015 from $622 million in 2011, according to the Pew Research Center’s Project for Excellence in Journalism. The report cited data from buyout firm Veronis Suhler Stevenson LLC. Conventional AM/FM radio’s sales will rise 12 percent over the same period, while satellite will gain 34 percent, according to Pew.
Traditional radio also faces an expanding threat from mobile phones: More Americans are using the devices to play Internet radio in their cars. The proportion rose to 11 percent last year from 6 percent in 2010, according to the Pew report. Pandora’s service also comes installed in 65 car models made by companies such as Toyota Motor Corp., Honda Motor Co., Ford Motor Co. and Bayerische Motoren Werke AG, up from three a year ago, Pandora said Sept. 12.
A company like Clear Channel might “look at Pandora and say, ‘This is to replace the revenue that I lost,’” he said in a phone interview. Clear Channel’s competing service, iHeartRadio, has 17 million registered users.
Because Pandora offers advertisers detailed metrics showing who was exposed to their pitches, Pandora has an advantage over terrestrial radio companies, Pyykkonen said.
Companies like Google and Amazon may have the resources to build their radio services without acquiring Pandora, according to John Tinker, a New York-based analyst at Maxim Group LLC.
“Amazon, in the past, has chosen to build versus buy,” he said in an interview. Amazon created its own online video service that competes with Netflix Inc. (NFLX)’s.
Apple may not choose to compete directly with Pandora, said Charlie Wolf, a New York-based analyst at Needham.
“It’s really of second order of importance to Apple,” Wolf said in an interview. “I’m sure it would be a break-even operation, a service to owners of iPhones and tablets. It would certainly not be of a strategic priority for Apple. It’s way down the list.”
Pandora isn’t profitable, a potential deterrent to a buyer. The company’s net loss amounted to $16.1 million last year, and the loss is projected to widen to $31.1 million in fiscal 2013, analysts’ estimates compiled by Bloomberg show.
To Jon Irwin, the president of online-music service Rhapsody International Inc., Pandora has an attractive radio offering that could lure takeover interest, though he said his company isn’t interested.
“There will be consolidation in this space,” he said in an interview. “It doesn’t make sense to have all these music- delivery platforms that essentially do the same thing. To be successful, these services need to get to scale. Pressure for scale will drive consolidation.”
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