Monday, October 1, 2012

Would Pandora Survive Russian Winter?

If the world was fair, a new rival entering your market would have to compete head-to-head on features. Innovation would rule. But the world is not fair, and new rivals often enter your market specifically because they can win with inherent advantages that make head-to-head comparisons irrelevant. The software industry coined a term for this—Russian Winter. (Why?) And Pandora may be about to experience it.

Russian Winter has been a factor in the rise and fall of many products. Two examples:
  • Mosaic, the first inernet browser, was invented at NCSA. Netscape commercialized Mosaic in 1994, and Netscape Navigator commanded 80% market share at its peak in 1996. Microsoft countered by introducing Internet Explorer. Whether or not it was a better browser than Netscape Navigator was irrelevant. As a stand-alone product, you can't compete with "pre-installed with Windows." Microsoft achieved 80% market share by 2000, 95% at its peak in 2002, completely defeating the invasion of its Desktop.
  • Similarly, the market for simple chart-drawing software was once dominated by Visio and Autodesk Actrix. Feature-for-feature, you could make the case for either one. But when Microsoft bought Visio (the company) in 1999, the climate became much chillier. As a stand-alone product, you can't compete with "bundled in Office." Autodesk cancelled Actrix almost the same day, ceding the market to Microsoft.
In both cases, the victory virtually shut down disruptive innovation in these technology areas.

Pandora invented user-customized radio. You select a song and it will program a stream of more like this music based on its musical "genome." It now streams more than a billion user hours per month. Consumer awareness of Pandora is 50% among internet users, double that of its nearest competitors.

But a new competitor may be entering the market. The Wall Street Journal and New York Times reported that Apple is preparing an audio streaming service to compete with Pandora. How does Apple bring Russian Winter to the streaming audio market? Five things are immediately apparent:
  1. Installed Base. You can't compete with "pre-installed on 365 million iOS devices."
  2. Halo Effect. There is no brand loyalty like Apple brand loyalty. Not only will an Apple streaming service trigger an exodus of Pandora users who were there merely because there was no equivalent Apple service, the cool factor of Apple will bring many new users into the sector who were sitting on the sidelines. Pandora desperately needs these subscribers.
  3. Lack of Transparency. Pandora is having trouble turning a profit, and has to say so every fiscal quarter in SEC filings, incurring negative brand image. Apple will bundle its streaming service with iTunes, burying the costs inside the rosy financials of the world's largest music retailer.
  4. Leverage. The New York Post reported that Apple is negotiating directly with music labels for content, rather than adopt Pandora's disadvantageous statutory licensing model. Apple doesn't need Congressional support to make its business work.
  5. Game-Changing Ability. Pandora's service defines user-customized radio. But, with more that $100B in cash and securities available, Apple could raise the stakes by introducing new capabilities requiring capital investment that Pandora couldn't match in its current financial condition. Or, taking another cue from the software industry, Apple could offer its service free to listeners. In August 2012, UK retailer Tesco announced that it was closing its MP3 store, citing the rising capital costs of trying to stay competitive with the big players, Apple and Amazon.
Could it be that the real target of Apple's ambitions is Amazon? By adding a streaming music service to iTunes, Apple would force Amazon to roll out a similar service to stay competitive. Being acquired by Amazon could be Pandora's way out of the cold.

            Vinyl-to-Digital Restoration #43             

Artist: Paul Winter Consort
Title: Earthdance
Genre: New Age
Year: 1977

I'll admit, I chose this library title for this piece because of the artist name. But The Paul Winter Consort is a foundation group in my collection, with metadata tentacles radiating through many other titles. Among the descendent links: the groups Oregon and Gallery, and the musicians Glen Moore, Paul McCandless, Collin Walcott (1945-1984), David Darling and Ralph Towner.

© 2012 Thomas G. Dennehy. All rights reserved.


  1. Excellent analysis and comparison, Tom. I agree with your predictions. An exit/acquisition strategy should be high on Pandora's To Do list (also for Spotify, Rhapsody...) Perhaps the only other major player you did not mention who could challenge Apple and Amazon in the long run is Google. So far their streaming music offering has not been wildly successful, but they are a platform play one cannot ignore. The discussion points about both platforms in the comments section of this Gizmodo post are illuminating. It also reminds us that iTunes (and any streaming service) adoption is about so many more things - not just music listening: apps, other content such as movies and books, as well as the convenience of the UI and the mobile ease of use.

  2. iTunes 11.1 with iTunes Radio launched on 18-September-2013.