If Apple Doesn't Buy Pandora Another Tech Giant Will

By Markets Fool.com

Buyout buzz is once again pushing shares of Pandora Media higher. Speculation was the basis for the stock's short-lived pop a month earlier, and now the chatter is accompanied by Pandora adding a seasoned music industry vet to its board of directors.

Continue Reading Below

A Pandora buyout has always made sense. It has seemed like a no-brainer to me since 2012.

Pandora's growth has stalled these days, but it has still achieved far more than any of the tech giants with ill-advised digital musical aspirations. These are tech giants with tens of billions of dollars in their arsenal, and then you have Pandora sitting there with its reasonable $2.4 billion in enterprise value where even a modest premium would be a bargain.

How much do you think Apple has spent to cash in on the trend that finds the consumption of music going from outright downloads where it dominates through Apple iTunes to streaming where it's far behind Spotify and Pandora? Apple already shelled out $3.2 billion for Beats Electronics, and even if the deal was more for the headphone maker than its Beats Music subscription platform it wouldn't be a surprise to see suitors line up for Pandora if it was in play. If Apple is spending billions in music, why wouldn't its more desperate rivals including Microsoft and Alphabet be even hungrier for a legit brand in digital entertainment?

Pandora's stuck in many ways. It closed out 2015 with 81.1 million active listeners at the end of the fourth quarter, fewer fans than the 81.5 million it was attracting a year earlier. Overall listenership is up 3% over the past year, but knowing that the gradually thinning herd is spending more time engaging with the app isn't exactly comforting. Content costs are also rising as a result of escalating royalty agreements.

This paints an unsetting portrait, but it's also why Pandora is available. It wouldn't have to entertain buyout offers if it was on top of the world.

Continue Reading Below

More from The Motley Fool

However, there are also a couple of metrics that make the digital music pioneer very attractive. Beyond the 81.1 million active listeners -- a base that Apple, Microsoft, and Alphabet's Google aren't even close to approaching with their streaming music offerings -- Pandora saw its advertising revenue and subscriber revenue climb 22% and 19%, respectively, over the past year. Even with a flat audience advertisers are paying more to reach Pandora's listeners, and more of Pandora's listeners are willing to pay to avoid hearing them.

Most of Pandora's active users are freeloaders, and that's something that may sting Apple, Microsoft, and Alphabet if the goal is getting music buffs to pay up for content. However, the owner of Pandora is also the owner of the chance at converting those 81.1 million users into paying customers or perhaps even users of their mobile operating systems. Yes, it's not a coincidence that Apple iOS, Alphabet's Android, and Microsoft's Windows 10 are vying for smartphone supremacy.

Pandora's not pretty, but it's quite the catch. The moment one tech giant shows its intentions on bended knee the front porch will fill with gentlemen callers. Apple, Microsoft, and Alphabet have too much money to offer -- and even more to gain.

The article If Apple Doesn't Buy Pandora Another Tech Giant Will originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Apple, and Pandora Media. The Motley Fool owns shares of Microsoft. 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.