Apple Courtship of Beats Spotlights Allure of Pandora

May 10, 2014 1:40 pm ET

(Corrects name of Csathy’s company in second paragraph.)

May 10 (Bloomberg) -- Apple Inc.’s plan to buy Beats Electronics LLC for $3.2 billion highlights the attractiveness of streaming companies such as Pandora Media Inc. and Spotify Ltd.

A deal between Apple and Beats, the headphone maker that launched a subscription music product this year, could speed a possible initial public offering of Spotify, the leading streaming-music service, said Peter Csathy, chief executive officer of Manatt Digital Media Ventures. Pandora, the biggest player in Web-based radio, may need to pair up to compete with a rival that combines hardware, software and the music-industry ties of Beats founders Jimmy Iovine and Dr. Dre, he said.

“There’s bound to be accelerating discussions and strategies on multiple fronts from all the players not in this deal,” Csathy said in an interview. “This is clearly a shot across the bow to other on-demand streaming services.”

Apple brings marketing muscle to spur sales of Beats headphones and the adoption of the $9.99-a-month Beats Music, Csathy said. Beats could help Apple break into the automotive cockpit, putting pressure on Pandora and Sirius XM Holdings Inc., he said.

One clue to the deal’s impact was how investors in Pandora reacted. In the past 18 months, Pandora’s stock has nosedived at least five times in response to news reports on Apple’s competing music plans and its entry into the automotive market. The drops ranged from 8.6 percent to 17 percent in a single day.

Pandora Stock

This time it was different. Pandora, seen as a potential acquisition target, rose 1.9 percent to $22.62 yesterday, following reports of Apple’s discussions to buy Culver City, California-based Beats.

A tie-up with a deep-pocketed tech or consumer-electronics partner would resolve investor concerns about companies such as Spotify and Pandora, which have struggled to turn a profit. Samsung Electronics Co., locked in battle with Apple for control of the mobile device market, recently shut down its own subscription music service. The company, in partnership with Slacker Inc., this year unveiled Milk Music, a Pandora-like radio service.

Pandora, the Oakland, California-based leader in online radio, may be attractive to companies including Microsoft Corp. or Facebook Inc. as its service reaches into automobiles, said John Tinker, an analyst with Maxim Group LLC.

“Any number of the large tech or media companies with big balance sheets could easily digest Pandora if they feel like music is part of the entertainment package they want to offer,” said Tinker, who rates Pandora a buy. “If you were to look at them, this is a good time.”

Licensing Deals

Mollie Starr, a spokeswoman at Pandora, declined to comment. The shares have fallen 43 percent from a March 5 peak, making a deal more affordable.

Pandora has 76 million monthly users for its Web-based radio service, which offers a free option and ad-free subscriptions costing $4.99 a month to new users. The company relies on compulsory licensing deals for music, which has led to friction with artists and record companies.

Spotify, the world’s largest music-streaming service, has more than 9 million users worldwide. The company, which offers free and $9.99-a-month ad-free options, has expanded to 56 countries from 17 in early 2013.

The company had no comment on speculation about an acquisition or an initial public offering, according to Graham James, a spokesman.

Wearable Devices

To be sure, the Apple-Beats tie-up isn’t just about streaming music. With Beats, Apple would gain the leading headphone maker, along with a subscription music service that complements iTunes downloads and iTunes Radio.

The marriage could produce new wearable devices, in-car units and renewed strength in the companies’ core product lines, said Paul Verna, an analyst with eMarketer.

“What’s driving this deal is the potential to create hardware products that leverage the companies’ expertise,” Verna said. “Apple was able to really make this whole idea of tying in hardware and software work. This is an extension.”

The two companies have similar visions for enhancing the entertainment experience while on the road. Apple this year began offering its CarPlay automotive platform on some Ferrari, Honda, Hyundai, Mercedes-Benz and Volvo models.

CarPlay lets drivers plug in their iPhone and use the screen from a car’s built-in display to view Apple Maps, make calls, send and receive messages via Siri voice control, and listen to music. Beats Music is among the supported apps.

Beats Audio, which can include speakers and sound enhancement equipment, is available on some Chrysler, Dodge and Fiat models.

--With assistance from Alex Sherman in New York and Ari Levy in San Francisco.