With profits proving elusive, the stakes are high among digital-music platforms such as Pandora Media , Apple Music, and Spotify.
With its shares having shed roughly 35% of their value in the past month, largely because of its abysmal earnings report, Pandora is the perfect embodiment of the challenges that exist in this fast-paced sector.
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That's painful to look at, but there also might be a glimmer of hope for Pandora investors. Though things such as ongoing user declines should rightfully sound investors' alarm bells, Pandora's CEO also offered an explanation that both paints a return to normality as being around the corner and puts Apple Music on the defensive.
Pandora CEO Brian McAndrews offered this data point as part of his explanation about ongoing user declines, "I am pleased to say that, given the scale of press and consumer attention on this launch, the impact on our active users and listening hours was muted and was, in fact, consistent with what we experienced during the launch of Apple's radio service in 2013.
There's just one question worth asking here: Should you believe him?
Pandora's silver lining? Although the continued lack of profit loomed large, the ongoing user losses were without question the most alarming aspect of Pandora's disappointing third quarter. Specifically, Pandora lost 1.3 million users during the third quarter, which marks the fourth straight sequential decline in its subscribers.
Source: Pandora investor relations.
There's a simple scapegoat here: Apple Music.
On Pandora's conference call, CEO Brian McAndrews said, among other factors, that the initial free three-month trial Apple offered to spur user adoption of Apple Music played an especially prominent part in its ongoing subscriber declines. There's undoubtedly some truth to McAndrews' claim. Although I use Spotify, I also opted for a free trial of Apple Music, which I dropped once the free three-month trial ended. Although knowing the exact degree of the effect isn't possible, it's fair to say that Apple Music probably helped cannibalize some of Pandora's listeners. At the same time, though, this strikes me as McAndrews seeing the trees but missing the forest, as Pandora's subscriber defections have been a major theme all year. So is this just a simple one-off effect as McAndrews claims, or a sign of something more pernicious for Pandora?
Risky business at Pandora Although in theory those 1.3 million users could simply begin using both services, in reality, this probably means bad news for either Apple or Pandora.
For Pandora, continued subscriber losses suggest that its user growth struggles have become a full-blown trend working against the company. Pandora loves to note that its total hours listened per user continue to trend upward, especially after the company ended its 40-hour time cap in August 2013. The problem is that hours streamed per user probably has a natural ceiling at some point. So for Pandora to continue to grow in a sustainable, long-term sense, the company must also find ways to keep adding users. So if those 1.3 million users indeed don't come back to Pandora, it doesn't paint a pretty picture for the streaming-radio pioneer.
It's worth noting that McAndrews said the service saw a similar user decline when Apple launched iTunes Radio in 2013. So if those 1.3 million users truly were simply testing Apple Music with no intention of actually subscribing, it also doesn't say anything encouraging about the stickiness of Apple Music. The high-level data suggests otherwise, though. On its most recent conference call, Apple CEO Tim Cook announced that the service had gained 6.5 million paying subscribers, which means the service's revenue has quickly approached Pandora's sales base in only a few months.
It's impossible to determine whether the 1.3 million subscribers lost in the most recent quarter imply declining fundamentals at Pandora or will indicate a lack of stickiness with Apple Music if they come back to Pandora. That said, the structural reasons that subscribers are leaving Pandora remain, by and large, intact. I've expressed my concerns about Pandora in the past -- namely, that it's lost the battle against superior and more feature-rich on-demand products such as Spotify, Apple Music, and more. And while Apple Music has plenty of room for improvement, Pandora's four straight quarters of declining active users still spells serious trouble for the radio-only online music provider.
The article Is This Music Metric a Red Flag for Pandora Media or Apple Music? originally appeared on Fool.com.
Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Apple and 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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