disputant calderon: Apple Radio Might Put Pandora in Play

In early September, reports began surfacing that Apple (AAPL) might get into the Internet radio business. That would put it in direct competition with Pandora Media (P), the dominant online radio service, and might put Pandora on the takeover wish lists of Amazon.com (AMZN), Google (GOOG), and Clear Channel Communications (CCMO). ?Because Apple is doing something,? says Richard Tullo, an analyst at Albert Fried, ?that makes everybody else want to counter their move.?

Tullo estimates that within a year Apple could win as many as 20?million users for an online service that streams music based on customers? tastes. Pandora has 150?million users, many of whom use the service on their phones?making it appealing to Google and Amazon. Radio station owner Clear Channel may also be interested as listeners shift to online media.

Online and mobile radio companies are winning market share from traditional broadcasters. Pandora represents 74?percent of online radio listening; its share of all U.S. radio use has climbed to 6.3?percent from 3?percent a year ago, Dominic Paschel, the company?s vice president of corporate finance and investor relations, said on Sept.?12 at an investor conference. ?That essentially makes us the largest station in most of the top?10? markets, he said. ?We anticipate being the No.?1 radio station in pretty much all of the top 180?markets by the end of the year.?

Google may want to counter Apple?s efforts because a new service might make its mobile devices more attractive than tablets and smartphones based on Google?s Android. Google could use Pandora to expand its offerings?and advertising?on computers, smartphones, and tablets. Google is ?trying to offer all the content and services to eke out more revenue per user,? says Tom Taulli, who analyzes acquisitions and initial public offerings for website IPOPlaybook.com. ?The people at Pandora know how to make compelling services that people like and love. That kind of expertise is extremely valuable.?

For Amazon, owning Pandora could make its recently updated Kindle Fire tablet more attractive to consumers, Taulli says. Buying Pandora would give Amazon ?critical mass overnight? in online radio listeners, says Laura Martin, an analyst at Needham.

Broadcasters like Clear Channel may consider Pandora a way to reignite growth, according to Martin Pyykkonen, an analyst at Wedge. Online and mobile radio revenue is projected to more than double to $1.63?billion in 2015 from $622?million in 2011, according to the Pew Research Center?s Project for Excellence in Journalism. Conventional AM/FM radio?s sales will rise 12?percent over the same period, while satellite will gain 34?percent, according to Pew. Clear Channel?s Internet service, iHeartRadio?started in 2008 and overhauled last October to better compete with Pandora?has 17?million registered users.

More Americans also are using mobile devices to play Internet radio in their cars. The proportion of cell phone owners who have used their phones to stream audio in a car rose to 11?percent last year from 6?percent in 2010, according to Pew. Because Pandora offers advertisers detailed metrics showing who was exposed to their pitches, it has an advantage over terrestrial radio companies, Pyykkonen says. A company like Clear Channel, he says, might ?look at Pandora and say, ?This is to replace the revenue that I lost.???

Pandora?s stock fell 17?percent to $10.47 on Sept.?7 amid the Apple speculation. It closed at $10.89 on Sept.?24. Needham says Pandora could fetch $14 a share in a takeover, a 29?percent premium, while Albert Fried sees the potential for a deal at about $20 a share. Mollie Starr, a spokeswoman for Oakland (Calif.)-based Pandora, declined to comment on a possible takeover. So did spokesmen for Amazon, Apple, Google, and Clear Channel.

While Pandora isn?t profitable, it is projected to increase revenue to $861?million in the fiscal year ending in January?2015, up 214?percent from $274.3?million in fiscal 2012, according to analysts? estimates compiled by Bloomberg. Offering both paid and advertising-supported services, Pandora generates more revenue from mobile-device ads in the U.S. than any company except Google, according to data compiled by EMarketer. Pandora?s strength is in ?the infrastructure they have created, it?s the advertising business, the success with mobile,? says John Rudolph, a senior adviser at investment bank Siemer Associates. ?Pandora has such a big installed base and such a huge number of users, there?s value in that.?

The bottom line: Pandora?s 150?million registered users and projected 214?percent revenue growth through 2014 make it attractive to media companies.