MorningWord 9/9/13: Back in June at AAPL’s World Wide Developers Forum the company introduced iRadio, their answer to Pandora’s success in the online streaming music space. Since the inception of iTunes 10 years ago, AAPL has avoided business models for music where the iDevice holder does not purchase the song or album and pay AAPL their 30% fee. It is a testament to Pandora’s product that AAPL is in fact going down this route as years of competition from earlier upstarts like Napster & Rhaposdy barley put a dent into AAPL’s staunch defense of their music distribution/sales model.
For years there were some fairly large impediments to mobile music streaming, namely wireless networks and devices that could not deliver a strong user experience, but in our very connected world, with most places having wifi and the proliferation of 4g wireless networks, the time seems to be right for companies like AAPL so focused on delivering a high quality user experience.
Tomorrow at AAPL’s press announcement for the launch of their new iPhones, iRadio is likely to get a lot of play. For the new iPhone that is likely to sport very little NEW, iRadio will be a highlight of the services that AAPL hopes will differentiate itself from other phone vendors.
Some would argue that Pandora (P) may fall victim to its own success, now that AAPL has its sights set on its core business. The streaming music player may have seen its best days before it goes the way of Napster. Despite all of the negative sentiment surrounding AAPL’s impending entrance to the space, P shares have risen 112% ytd, quickly approaching the post IPO 2011 highs. The chart since inception (below) looks like a dozen or so other web 3.0 stocks that went public in the last few years, that many including me have argued have striking resemblances to past internet stock cycles, particularly the booms and the busts.
Late last year, prior to investors even sniffing iRadio, P shares were making new all time lows, and many suspected that was it, that you could put a fork in P as the model was engulfing itself with disappointing subscriptions and lower than expected ad rates.
Despite increasing competition, P is doing what any good innovative growth company should be doing, reinvesting in their business, forgoing short term profits to help grow market share. IN some ways you could draw comparisons to FB over the last year, the stock and the company were nearly reviled by investors before they got a taste of user monetization and demonstrated crossover success on mobile devices.
In late August when the company delivered better than expected Q2 results the stock got drilled (-13%) from 52 week highs as they guided q3 down on higher expenses. There were some highlights in the quarter though as the company grew active users 30% year over year to 71 million at a time where they are experimenting with taking off mobile listening caps.
The stock has all the makings of a speculative stock with high valuation, no earnings and tons of emerging competition. I have suggested on more than once occasion that P is not likely to remain a standalone company for long – to me it looks more like a tab on wider platform. With only a $3.4 billion market cap, no debt and sales of ~$870 million expected to grow 30% a year for the next couple years, the company could be an easy target for any number of company’s that have AAPL’s iEcosystem in their sites. Trading at 6.3x sales, with earnings expected to be minuscule for the time being, there are no shortage of large media/technology players who would balk at what would likely need to be a $4.5 plus billion deal (30% premium) but come on, MSFT just made a $7.2 billion acquisition that most analysts are fairly certain they will likely write off a good chunk of in a few years. While we know how the NOK deal will end, the Pandora story is far from over and could offer multiple cross-selling opportunities, or merely an enhanced service offering to any number of players looking to crack the iTunes nut.
In the meantime, AAPL’s phone will be all the rage at tomorrow’s meeting. But the real changes are happening under the surface, as the AAPL ecosystem adjusts to a new digital world.