Amazon’s (AMZN) new streaming-music service, known as Amazon Prime Music, doesn’t even really compete with Pandora (P). But it still isn’t good news for anyone holding Pandora stock for the long term.
At first blush, it looks like Amazon Prime Music couldn’t do much harm to Pandora. There’s probably little overlap between the two services, for one thing. But even if Amazon Prime Music doesn’t make a dent in Pandora’s listener base, it’s one of the last things the company needs.
Pandora stock is down 35% from a 52-week high set just three months ago. The company can’t afford even a scratch at this point, and having any new entrant into the streaming-music field is not good news — especially when the new competition is as resourceful and relentless as Amazon.
The newly launched Amazon Prime Music service is available only to members of the company’s $99-per-year Amazon Prime membership program. That’s a nice add-on for Amazon Prime customers, but seems unlikely to steal market share away from Pandora.
After all, Pandora had 77 million active listeners at the end of May, but fewer than 4 million of them actually paid for subscriptions. True, capping the number of hours users can listen to its free mobile service was shown to add subscribers, but even that was somewhat self-defeating.
That’s because Pandora makes for more money per user of its free, ad-based service than it does from subscriptions. Only about 12% of annual revenue came from subscriptions last year, partly because there are so few, but also because Pandora makes more from ad-supported listeners.
At any rate, users of a free service aren’t signing up with Amazon Prime Music and ditching Pandora. And Pandora subscribers — its heaviest users — seem really unlikely to dump the service. An Amazon Prime membership costs essentially $100 per year. Pandora is $4.99 per month, which is still $40 cheaper than Amazon Prime on a yearly basis.
Subscribers aren’t the key to Pandora’s future, anyway. Pandora needs to figure out how to make more money off the other 70-million-plus free listeners it has.
Amazon Prime Music Not a Threat — For Now
That said, no one likes to see Amazon on the same playing field. Amazon Prime Music may be just another feature for Prime membership for now, but there’s no telling what Amazon could do with it in the future. That kind of uncertainty and narrow moat only adds pressure to Pandora’s already difficult position.
True, Pandora has a first-mover advantage among music-streaming services, but as popular as it may be, its market share amounts to less than 10%. Furthermore, the industry is intensely crowded, with few barriers to entry for the likes of Amazon or other goliaths.
Don’t forget that Apple (AAPL) just became another headache for Pandora with its acquisition of Beats. Throw in rising costs related to licensing music, and the headwinds for Pandora stock are intense.
Pandora revenue has to keep accelerating to justify the high multiples on the stock. The company sure can’t do it with net income, of which there is none. Anything that competes for those dollars — now or later — could quickly send P stock into a nosedive.
As it exists now, Amazon Prime Music isn’t worth getting too worked up about for owners of Pandora stock. But it represents a long-term enemy, and Pandora stock owners already had enough to worry about.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.