Apple Radio Might Put Pandora in Play

In early September, reports began surfacing that Apple (AAPL) might get into the Internet radio business. That would put it in direct competition with Pandora Media (P), the dominant online radio service, and might put Pandora on the takeover wish lists of Amazon.com (AMZN), Google (GOOG), and Clear Channel Communications (CCMO). “Because Apple is doing something,” says Richard Tullo, an analyst at Albert Fried, “that makes everybody else want to counter their move.”

Tullo estimates that within a year Apple could win as many as 20 million users for an online service that streams music based on customers’ tastes. Pandora has 150 million users, many of whom use the service on their phones—making it appealing to Google and Amazon. Radio station owner Clear Channel may also be interested as listeners shift to online media.

Online and mobile radio companies are winning market share from traditional broadcasters. Pandora represents 74 percent of online radio listening; its share of all U.S. radio use has climbed to 6.3 percent from 3 percent a year ago, Dominic Paschel, the company’s vice president of corporate finance and investor relations, said on Sept. 12 at an investor conference. “That essentially makes us the largest station in most of the top 10” markets, he said. “We anticipate being the No. 1 radio station in pretty much all of the top 180 markets by the end of the year.”

Google may want to counter Apple’s efforts because a new service might make its mobile devices more attractive than tablets and smartphones based on Google’s Android. Google could use Pandora to expand its offerings—and advertising—on computers, smartphones, and tablets. Google is “trying to offer all the content and services to eke out more revenue per user,” says Tom Taulli, who analyzes acquisitions and initial public offerings for website IPOPlaybook.com. “The people at Pandora know how to make compelling services that people like and love. That kind of expertise is extremely valuable.”

For Amazon, owning Pandora could make its recently updated Kindle Fire tablet more attractive to consumers, Taulli says. Buying Pandora would give Amazon “critical mass overnight” in online radio listeners, says Laura Martin, an analyst at Needham.

Broadcasters like Clear Channel may consider Pandora a way to reignite growth, according to Martin Pyykkonen, an analyst at Wedge. Online and mobile radio revenue is projected to more than double to $1.63 billion in 2015 from $622 million in 2011, according to the Pew Research Center’s Project for Excellence in Journalism. Conventional AM/FM radio’s sales will rise 12 percent over the same period, while satellite will gain 34 percent, according to Pew. Clear Channel’s Internet service, iHeartRadio—started in 2008 and overhauled last October to better compete with Pandora—has 17 million registered users.

More Americans also are using mobile devices to play Internet radio in their cars. The proportion of cell phone owners who have used their phones to stream audio in a car rose to 11 percent last year from 6 percent in 2010, according to Pew. Because Pandora offers advertisers detailed metrics showing who was exposed to their pitches, it has an advantage over terrestrial radio companies, Pyykkonen says. A company like Clear Channel, he says, might “look at Pandora and say, ‘This is to replace the revenue that I lost.’?”

Pandora’s stock fell 17 percent to $10.47 on Sept. 7 amid the Apple speculation. It closed at $10.89 on Sept. 24. Needham says Pandora could fetch $14 a share in a takeover, a 29 percent premium, while Albert Fried sees the potential for a deal at about $20 a share. Mollie Starr, a spokeswoman for Oakland (Calif.)-based Pandora, declined to comment on a possible takeover. So did spokesmen for Amazon, Apple, Google, and Clear Channel.

While Pandora isn’t profitable, it is projected to increase revenue to $861 million in the fiscal year ending in January 2015, up 214 percent from $274.3 million in fiscal 2012, according to analysts’ estimates compiled by Bloomberg. Offering both paid and advertising-supported services, Pandora generates more revenue from mobile-device ads in the U.S. than any company except Google, according to data compiled by EMarketer. Pandora’s strength is in “the infrastructure they have created, it’s the advertising business, the success with mobile,” says John Rudolph, a senior adviser at investment bank Siemer & Associates. “Pandora has such a big installed base and such a huge number of users, there’s value in that.”

The bottom line: Pandora’s 150 million registered users and projected 214 percent revenue growth through 2014 make it attractive to media companies.

Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore. Fixmer is a reporter for Bloomberg News in Los Angeles.

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Facebook's Rocky IPO Might Spur Reforms

Facebook’s (FB) initial public offering had more bumps than an unpaved road after a Midwestern winter. The exchanges went haywire, the stock plummeted, the Nasdaq boss was on a plane, incommunicado. All those potholes have prompted both chambers of Congress to examine the way companies go public and are traded.

On Wednesday, the Senate Banking Committee looked at whether the IPO process works for retail investors, while the House Financial Services Committee’s hearing focused on whether U.S. stock markets are reliable.

Nasdaq OMX (NDAQ) Chief Executive Officer Robert Greifeld declined an invitation to testify before the House hearing, Bloomberg News reported last week. Greifeld, who opened the May 18 trading day in California with Facebook executives, was traveling back to New York when the trading problems surfaced, the Wall Street Journal reported on June 11.

In the Senate, several panelists expressed concern that large institutional investors may have had access to more information about Facebook’s future prospects than retail investors did. “The deck is stacked against us,” said Ilan Moscovitz, a writer and analyst for the Motley Fool website.

The panelists proposed several fixes. For example, many companies post online—as Facebook did—a version of the roadshow presentation they make to big investors. Ann Sherman, an associate professor of finance at DePaul University, says those videos are tightly scripted. (Bloomberg Businessweek’s Jim Aley reviewed Facebook’s roadshow movie for its production values.) Still, Sherman says individual investors miss the Q&A portion of the roadshow, which provides not only greater information but a chance to evaluate how top executives interact and handle tough questions. Both Sherman and Lise Buyer, a consultant who worked with Google (GOOG) on its IPO, told the Senate panel they support making a Q&A available online; this could be recorded from presentation to institutional investors or hosted as a live-streamed session answering questions from Main Street investors.

Several panelists also said the situation for retail investors is getting worse because of the JOBS Act, which Congress passed in early April. The law loosens the reporting requirements for companies that have less than $1 billion in annual revenue and wish to go public. Moscovitz said it will lead to increased low-quality IPOs. “Think more Pets.com than Google,” he said. Moscovitz said the $1 billion limit was too high and that Congress should lower the threshold at which companies must fully comply with accounting and reporting rules.

In the House, the hearing looked at a range of issues, including high-frequency trading and the rise of so-called dark pools that move trading onto private platforms. Duncan Niederauer, CEO of NYSE Euronext (NYX), said people have lost trust in the market. “What used to be an investors’ market is now thought of as a traders’ market,” he said.

In his testimony, Dan Mathisson, a managing director at Credit Suisse Securities (CS), said exchanges such as NYSE and Nasdaq should be legally liable for major problems like the software glitches that plagued the Facebook IPO. “We believe the best way to reduce the chances of similar technology problems from occurring in the future is to remove protections which grant exchanges ‘absolute immunity’ from liability,” he wrote.

When major technical problems arise, as Nasdaq encountered with the Facebook IPO, other players are left in the dark, said William O’Brien, a former Nasdaq executive who is now CEO of Direct Edge Holdings, a Jersey City (N.J.) company that owns exchanges. “No hotline, no market-wide escalation procedures, no nothing,” O’Brien said in written testimony. He said that during trading failures, better coordination among trading sites is needed to stop problems from cascading. He also called for greater SEC oversight of the technology that runs exchanges.

Most of the suggestions Congress heard on Wednesday were not new ideas—the Facebook IPO just provided a recent and stark reminder of problems that persist.

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Yes, Germany Might Boost Inflation. Here's How

The Financial Times reports today that Germany’s central bank, the Deutsche Bundesbank, “has signaled it would accept higher inflation in Germany.” The newspaper story says this would be “part of an economic rebalancing in the euro zone that would boost the international competitiveness of countries worst hit by the region’s debt crisis.”

This leads to two questions: Is it true, and how could it happen?

The answer to the first question is, yes, it’s true, and it’s not even particularly surprising. Not enough to justify making it the main story on the front page. ”Of course, the Bundesbank is stating the obvious,” Christian Schulz, senior economist in London at Berenberg Bank, Germany’s oldest bank, wrote me today in an e-mail.

What’s obvious is that with other countries, such as Greece, sliding into deep recessions with falling prices, the only way the euro zone as a whole can stick to its inflation target is for the stronger countries, such as Germany, to permit inflation rates above the euro zone average. The European Central Bank sets a medium-term goal of under but close to 2 percent per year for inflation in the euro zone as a whole.

“It’s simple arithmetic,” says Kermit Schoenholtz, director of the Center for Global Economy & Business at New York University’s Stern School of Business.

So that’s the math. The second question is how one country can have higher inflation than another if they share a single currency.

Easily. Even different parts of the U.S. have different rates of inflation. For example, prices are rising faster in North Dakota these days because of the influx of people and machinery to extract oil and natural gas. Inflation differentials are bigger and more persistent in Europe than in the U.S. because the barriers within the euro zone are higher than the ones in the U.S. “dollar zone.” Labor, for example, doesn’t move as easily across national borders to places where wages are higher, so wages can get stuck at uncompetitive levels (as in, say, Spain).

For years, Germany had lower inflation than the likes of Greece, Portugal, and Spain. That was because the peripheral economies were growing rapidly and businesses were careless about keeping a lid on costs. Germany grew at a healthy clip as well but focused relentlessly on improving productivity, so its costs rose more slowly. That’s why Germany’s economy is far more competitive today.

“If the euro area is going to hang together over the long run, you have to undo those competitiveness gaps that have been created,” says Schoenholtz. The peripheral countries need to lower their prices relative to Germany’s. If Germany had very low inflation, those countries would require outright deflation, which is extremely painful. If Germany accepts somewhat higher inflation, primarily via more generous wages to workers, the rest of Europe can have a low but still positive inflation rate.

Says Schoenholtz: “To anybody who’s a monetary economist, this isn’t news.”

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