Pandora shares reel on rumor of Apple radio service

Shares of Pandora Media plummeted as much as 21% on Friday after word leaked out that Apple has been in discussions with record labels to launch a competing streaming radio service.

Apple’s proposed online service, first reported by the Wall Street Journal, would have the potential to disrupt both Internet and traditional radio providers.

Cupertino, Calif.-based Apple is seeking a more flexible type of music license from the record labels than the one Pandora has. It would allow Apple to select whatever song it wants to play next and tailor selections based on albums in listeners’ iTunes music libraries, according two industry executives with knowledge of Apple’s plans for the service.

Such features would give Apple the ability to customize its music to individuals, which traditional radio can’t do, without having to ask them what they like or restrict how often a single song can be played, as Pandora must.

Pandora’s stock plunged as much as 21% in trading Friday, dipping below $10 in the morning before recovering slightly. It closed at $10.47, down 16.7%.

Apple’s stock, meanwhile, marched up $4.17 Friday to close at $680.44 -- a new all-time high for the company.

A Pandora spokeswoman declined to comment, and Apple did not return calls seeking comment.

Why did Wall Street have such a dramatic reaction?

“This is Apple,” said Michael Pachter, an analyst with Wedbush Securities. “If Apple wants to compete with you, then you got a problem.”

For years, Apple and Pandora had a symbiotic relationship. After launching its Internet radio service on Apple’s iPhone in 2008, Pandora’s application skyrocketed in popularity, becoming one of the most-downloaded applications for the device.

Pandora, which had struggled to reach listeners on personal computer Web browsers, saw its audience explode, enabling the company to stem its losses by selling more advertising on its service.

Apple benefited from having one of the most well-liked entertainment services on its phones and tablets without having to spend a cent to develop the product. Now, however, Apple is negotiating deals with music labels for its planned radio streaming service.

“The big open question is: Why is Apple doing this now?” Pachter said. “The answer is that they fully intend to make a lot of money from this, and the way to do it is to sell more songs. The record labels embrace this because they see Apple can integrate iTunes downloads into the radio offerings in a much more compelling way than Pandora can.”

Still, Pachter said, if Apple proceeds with launching a radio service, Pandora isn’t necessarily toast.

“They have a big install base, and they’re on Android,” he noted. “They’re not going to just lose all their customers overnight. I’m sure they’ll keep at least three-quarters of their customers or more, if Apple follows through. It’d be more of a setback as opposed to total devastation, but they’ll recover.”

Pandora, which had a rocky time since going public last year, looked as if it may be turning the corner last quarter. Its shares jumped as much as 12% immediately after it reported that second-quarter revenue. That was up 51% from a year earlier to $101.3 million in the quarter that ended July 31.

Executives of the Oakland, Calif., company also said that third-quarter revenue probably would come in as high as $118 million -- higher than the $114 million that financial analysts had expected -- and that it would probably break even in the third quarter or even make a penny a share.

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