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It doesn't look like anything can slow down Spotify these days. Not even Taylor Swift, who pulled her songs from the music streaming service in defense of artists being paid fairly for their work.
The on-demand streaming music service announced earlier this month that it just surpassed 60 million monthly active listeners with 15 million paid subscribers. Comparatively, Pandora Media last reported that it had 76.5 million monthly listeners as of Sept. 30.
Pandora's growth has slowed significantly in the last year or so, with the number of average listeners per month growing just 5.2% YOY in the third quarter of 2014. Considering Spotify added 10 million listeners in just the last two months, it's likely only a matter of time before Spotify's numbers overtake Pandora's.
So, just how big of a threat is Spotify to Pandora?
Where are those listeners?
Pandora only operates in the United States, Australia, and New Zealand. Spotify operates in around 50 countries including almost all of the Americas, Western Europe, Australia, New Zealand, and some southeast Asian nations.
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Looking more closely at the United States, Pandora's biggest market, 51% of U.S. Internet users reported listening to Pandora in November of last year according to a recent report from RBC Capital Markets. Only 14% reported listening to Spotify. Both of those numbers are up significantly from 2013. Twenty-seven percent of U.S. Internet users reported listening to Pandora in December of 2013, while just 6% reported listening to Spotify.
Last December Pandora reported 76.2 million listeners, slightly below its average for the third quarter. If RBC Capital Markets' numbers are accurate, we should see a significant increase in listeners when Pandora reports its fourth-quarter results.
But what are they listening to?
So far, Spotify doesn't seem to have made a huge impact on Pandora's biggest territory. While global listeners are nearing the same level as Pandora's, the trend hasn't quite taken off in the U.S.
Still, Spotify's presence in the market is growing. More than twice as many Internet users reported using the service in November as 11 months earlier. As the company continues gaining notoriety in the U.S., it's bound to attract more listeners to at least try the free service. And that's where it can really hurt Pandora.
Even if Pandora can attract listeners, it's more important for it to grow listener hours. Last quarter, Pandora grew listener hours 25% from Q3 2013 to Q3 2014, but that number is artificially inflated by listening limits imposed on mobile listeners in 2013.
Compared to the fourth quarter of 2013, listener hours in Q3 2014 improved just 10%. Keep in mind that listener hours generally increase in the fourth quarter, so it's not a perfect comparison. Investors should keep an eye on this metric when Pandora reports fourth-quarter earnings.
The one thing that could hinder its growth in listener hours is Spotify. Nearly 80% of respondents who used both Pandora and Spotify said they were replacing listening hours on Pandora with time on Spotify, according to an eMarketer report. While heavy users of Pandora were unaffected, the percentage of people listening between one hour and 20 hours per week fell, replaced by users listening less than one hour per week.
Pandora doesn't have a high percentage of power users. Just 5% of listeners use the service more than 20 hours per week, which correlates with the percentage of paid subscribers. At the end of the third quarter, Pandora had 3.53 million Pandora One subscribers accounting for approximately 4.6% of total listeners. Spotify, comparatively, is able to convert about 25% of listeners into premium subscribers.
From a behavioral standpoint, people are more likely to use things they pay for. If Spotify is able to convert free listeners into paid subscribers at a rate of 25%, as it has, it doesn't bode well for Pandora. Paid Spotify subscribers will spend more time listening to Spotify over the free Pandora radio service.
Growing revenue while listeners leave
Pandora did an excellent job growing listeners and listener hours in 2014, but it's not clear the company can keep this up going forward. Spotify is just the tip of the iceberg as more music streaming services go mainstream.
Considering that Spotify's presence in the U.S. is still relatively small compared to Pandora's, there's a lot of potential for it to disrupt Pandora's active listener base as it gains popularity. As it converts more free listeners into subscribers, users are more likely to spend more time listening to Spotify over Pandora.
Pandora still has room to increase its ad load, and it's spending heavily on its sales team to sell ads in local markets, which command a higher average ad price than big national brands. Analysts believe Pandora will continue to grow revenue by more than 30% this year, but competition from Spotify and other on-demand music streaming services like YouTube Music Key and Beats Music may hold it back from reaching those levels.
The article Could Spotify Take Down Pandora Media Inc. in 2015? originally appeared on Fool.com.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Pandora Media. The Motley Fool owns shares of Pandora Media. 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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