Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

It's a recurring theme: a new music service hits the market, Pandora's stock price takes a dip. It happened with Spotify. It happened with news of Apple's upcoming radio service. And it happened Monday with Microsoft's new Xbox Music.

Shares of Pandora fell 4.2% to $9.02 before leveling off at $9.10 at midday. The slight decline was more of an acknowledgement of Xbox Music's arrival than a fearful retreat. But the drop was clearly the result of another new music service appearing on the market.

As I have written before, Pandora investors need not worry about every new service. Their reaction to Xbox Music on Monday, albeit slight, lends a bit too much credence to Microsoft. The company has a good distance to go before it's a serious competitor to other Internet radio services, cloud storage services, Internet radio services or hybrids of the three.

But Pandora investors do need to worry about the low barriers to entry of Internet radio. Companies use the Section 114 compulsory license to bypass direct negotiations with record labels and operate as a webcaster. This has allowed webcasters to operate on a relative shoestring. At the same time, larger companies like Microsoft that can afford on-demand services are adding radio functions to their toolkits.

Since I have started pointing out these low barriers to entry, Apple has announced its intention to launch its own Internet radio service, Samsung has launched its Music Hub service that includes a radio service, Nokia has launched a radio-like Nokia Music for its smartphones, and now Microsoft has launched a new music service that includes a radio function.

Other companies are likely to follow. Who will they be? It would be entirely logical for companies already in the cloud music and digital download space (Google, Amazon) and the smartphone space (Hewlett-Packard, HTC) to acquire or develop some kind of Internet radio service. The way Xbox Music incorporates radio into its collection of services makes its competitors' lack of radio all the more obvious.

Pandora won't be easily pushed around, however. It has three advantages: it is a single-purpose company, it excels at its single purpose and it has a very large lead on its competitors. The company does not have the financial muscle of most of its competitors in this space, but it puts out a better product.

Music-focused Internet radio could come down to a two- or three-horse race at some point, but only one of those horses is currently in the race. Pandora has a product that people love. The race is open to companies that can put out an equally great product. There's nothing on the market right now that fits the bill, but the space is wide open.

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