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Disrupting the Disruptors

· June 14, 2012

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In a testament to how quickly Internet markets move, Barclays Capital reiterated its “Underweight” rating for Internet radio company, and traditional radio disruptor, Pandora Media on account of new competitive threats coming from two different angles.  Amazon’s Cloud Player for the iPhone, that allows users to stream the exact song they want to hear, and Songza, a new Internet radio company that streams songs according to your mood (and it has a cool user interface to boot).  Of note, one company is a huge corporation with a market cap of nearly $100 billion and the other is a classic startup from Long Island City, New York.  Barclays also notes, as is often the case in Internet markets, “barriers to entry in internet radio may not be as high as many believed.”  Bad for investors and Pandora, but good for consumers and entrepreneurs with new ideas on how to deliver music to people. More from Barclays below:

With the release of an iPhone version, AMZN’s Cloud Player is now available on over 80% of U.S. smartphone devices (comScore), as it was already available for Android.  The app allows users to stream music from the cloud and import MP3s purchased from AMZN. Also notable is that the first 5 GB of storage are free. We believe this presents a compelling alternative to Pandora, as users can stream the exact song they want to hear rather than a playlist derived according to their assumed tastes. 

Though Songza’s 110,000 daily active users are less than 10% of Pandora’s 1.5M (AppData), the popularity of its iOS app suggests that Songza is rapidly gaining traction on mobile, where over 70% of Pandora listening occurs. In our view, Songza offers a compelling alternative in mobile internet radio, as it includes no audio ads and offers a wide variety of curated playlists accessible with a few clicks. Songza’s rising popularity, coupled with our belief that Spotify will launch an online radio service by year end, suggest that barriers to entry in internet radio may not be as high as many believed, and continued user and listening hours growth for Pandora could be more muted than expected.  

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.