Apple's Next Victim: Pandora?


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Apple's (NAS: AAPL) list of fallen foes is long and growing. According to a recent report from TheWall Street Journal, the iPhone maker may be looking to add another notch to its iBelt: popular music streamer Pandora Media (NYS: P) .

Party's over?
Thanks in large part to the wide spread of mobile devices, Pandora's user base and listener hours have exploded. Listener hours jumped from 1.8 billion to 3.3 billion last quarter, and the company now boasts 54.9 million active users as of the end of July. Much like Facebook, Pandora is also just now trying to figure out how to monetize mobile effectively. Its traditional computer monetization levels are nearly three times that of its mobile usage.

Even as the company is in the midst of working out the kinks of its business model, it's already trying to fend off competition from other streaming shops like Spotify. Now it may have the mother of all disruptors on its hands, looking to encroach on its turf.

No Androids allowed. Come on in, PCs!
Apple is now reportedly in licensing talks with the record labels over a similar service that could play through its large installed base of iDevices and Macs, and potentially even available on Microsoft (NAS: MSFT) Windows PCs, according to the report. Google (NAS: GOOG) Android devices are supposedly being left out of the mix, surprising no one as the former flames continue to duke it out.

The iPhone maker has considered such a move before, but this time it looks like the real deal. One key difference is that Pandora's royalty rates are mostly fixed by the government, while Apple is looking for its own terms since it has long-standing relationships with the labels and its service would be different and more interactive in some way.

It makes sense on so many levels
For Apple to launch a music streaming and discovery service seems inevitable in hindsight. The company is already the top dog in online music sales through iTunes, being the first legal mover back in 2003, when the digital store was launched. Even though iTunes has since expanded into just about every type of content imaginable, its kept the same moniker since the global branding is so powerful and instantly recognizable. iTunes already has one of the most comprehensive digital music libraries on Earth.

iTunes has also long had a Genius feature built in for music discovery, but it was relegated to selections within a user's existing library instead of being able to show listeners something they've never heard of before. It also just launched iTunes Match to up its game in streaming. Launching a music-discovery radio service like Pandora's is just a hop, skip, and a jump away.

You may also recall that Apple has its own mobile advertising platform, iAd, that it could use to serve up the ads to said service to provide it at little to no cost to the user.

Combined, Apple already provides the device, the ad platform, the music library, a limited discovery service, and a separate streaming service, so getting the record labels to sign off on a licensing deal would be the only piece of this puzzle to put together a more full-featured music discovery service.

Why bother?
To a certain extent, Pandora's service dissuades people from buying music on iTunes, so conceptually you could argue that Pandora is a threat to Apple in that way. That notion goes out the window, though, once you consider that iTunes and music-related sales comprise just 5% of trailing-12-month sales.

Even when it comes to operating income, which Apple doesn't disclose by segment specifically, management has previously said that iTunes runs just slightly above breakeven. Steve Jobs had also said iAd does the same. These types of moves by Apple aren't to boost its bottom line in any way. No, they're all done for the sake of the user and strengthen Apple's grip as users entrench themselves deeper into the ecosystem and keep buying devices.

It's all about the moat. iTunes is all about providing the content for users that can be seamlessly accessed on the device. iAd is all about benefiting developers, providing another method of monetization for them and effectively subsidizing app prices and keeping them low. An iTunes music discovery radio service would be done for the same reason and not for profit -- Apple makes enough profits on the devices.

This is also exactly why Apple is such a dangerous disruptor to tangential industries -- because it does these things without profit in mind, allowing it to undercut incumbents. GPS and mobile handheld gaming come to mind as having recently been on the receiving end -- online music discovery radio may be next.

Any proposed service certainly won't be up in running within a matter of days when Apple unveils the iPhone 5. As the biggest and most imminent event for Apple, investors need to get up to speed on how to profit from the iPhone 5. I've put together a comprehensive report on just that topic, and it's now included as a bonus for subscribers of our Apple research service. Sign up today and get it all.

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