Is Spotify's Model Better Than Pandora's?

Is Spotify's Model Better Than Pandora's?

Every streaming music operator eventually hits a fork in the road. Do you follow Pandora into the realm of ad-supported discovery or do you follow Spotify in offering on-demand streams in a largely subscription-based platform?

Tech titans Google and Apple finally jumped into this market by taking different roads at that fork. Google's digital music offering -- All Access -- is a kissing cousin to Spotify, offering access to millions of tracks without ads for $9.99 a month. Apple's iTunes Radio chose to gun for market leader Pandora, offering a service that is mostly consumed by freeloaders willing to put up with ads in serving up customized digital radio.

There will naturally be plenty of debate as to which approach is the best, but at least we have some fresh data to compare how Spotify and Pandora are doing.

Reports late last week detailing Spotify's move to raise roughly $250 million in financing -- valuing the company at a little more than $4 billion -- reintroduced how similar Pandora and Spotify are in size and valuation. Pandora's market cap is $5 billion. Spotify generated $585 million in revenue last year, just above the $427 million that Pandora posted in its previous fiscal year.

The comparisons begin to fall apart when we assess user bases. Spotify's 24 million active users are a little more than a third as many as Pandora's active listeners. The key here is that more than 6 million of Spotify's members pay as much as $10 a month to stream Spotify without ads and across devices.

In other words, a user is far more valuable to Spotify or Google than it is to Pandora or possibly Apple. I'm going with "possibly" for Apple because we don't know if its large user base will monetize effectively. Apple didn't roll out iTunes Radio until mid-September, but it was already bragging about attracting 20 million users collectively streaming more than a billion songs in its few weeks. We don't know if Apple is getting them to purchase more -- or possibly less -- iTunes Music Store tracks than they were before.

Despite the crowding market, Spotify's proposed valuation after last week's capital infusion is a record. Pandora also recently hit new highs before taking a step back after last week's mixed quarterly report. The market seems to be embracing both models, but the real winner -- the one that consumers embrace once the inevitable shakeout of tech giants and promising upstarts takes place -- remains to be revealed.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Pandora Media. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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