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Boxed in

23 October 2015 By Jennifer Saba

Pandora may need a new playlist. The internet music company blamed Apple’s new service for its slow growth in listeners during the third quarter. Pandora expects the effect to be short-lived, but investors cut the company’s value by a third on Friday. Buying a concert-ticket seller is one strategic change. Finding even more paying customers should be next.

A free three-month trial offered by Apple Music was the main reason why the number of monthly active users increased by only 2 percent over the summer from a year ago, Pandora boss Brian McAndrews told investors on Thursday. The 78 million was 1 million fewer than the previous quarter. Some 15 million tuned into Apple’s new offering, Chief Executive Tim Cook revealed this week.

McAndrews isn’t worried, though. He noted that a similar thing happened when Apple launched its radio service in 2013. Pandora’s audience soon started growing strongly again.

Since then, however, the competition has intensified. Rivals spent $100 million in marketing during the third quarter, according to Pandora. And unlike competitors Apple and Spotify, Pandora relies mostly on advertising for its revenue. It accounted for 80 percent of Pandora’s $920 million top line last year.

There’s also a risk that Pandora’s expenses could rise dramatically, too. Judges are expected to determine soon how much Pandora and other streaming-music services must pay to license music. Pandora currently spends 42 percent of sales on content.

Now valued at about $2.6 billion, Pandora is clearly testing new ideas. It rolled out a one-day pass with ad-free listening for 99 cents. Earlier this month, it also agreed to buy online ticket seller Ticketfly for about $450 million in cash and stock, in a deal that reduces its dependence on advertising.

It won’t be nearly enough, however, to cover the $1.4 billion in market value that Pandora had lost in afternoon trading on Friday. To compete in an increasingly cutthroat market with deeper-pocketed competition, the company may have to charge harder into the business of monthly subscription fees to lock up more regular revenue. Until Pandora changes its tune, investors probably won’t either.

 

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