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Pandora pressured by new Spotify service

SAN FRANCISCO (MarketWatch) -- Pandora Media Inc. found the market for its Internet-based radio service a little more crowded Tuesday, when rival Spotify said it would launch a new, free offering for mobile devices.

Pandora (P) shares fell as much as 7% Tuesday morning before erasing nearly all of its losses to close down by 2 cents at $11.45.

In a statement, Spotify said it would make its free mobile service initially available via an app for Apple Inc.'s (AAPL) iPhone and iPad. A free version of the service that works with Android-based devices will be released at a later date.

The free service will be ad-supported, and differs from Spotify's prior mobile offering in which users paid $10 a month to listen to the service on mobile devices. Spotify's new free offering is similar to what Pandora offers, in that users can listen to music and create stations based on criteria such as songs and artists. Pandora currently offers a free version of its mobile service that is supported by ads, or subscribers can pay an annual fee that does away with ads.

Spotify, which is based in Sweden, launched its service in the U.S. in July 2011. According to Michael Pachter of Wedbush Securities, Spotify has about 3 million paid subscribers, and 7 million subscribers using the service on a free, trial basis.

Pachter said that while Spotify might offer a similar service to Pandora, he believes Pandora will be able to maintain its top position in the online radio market that also includes iHeartRadio, Last.fm and Songza.

"We don't think that many Pandora listeners will defect in favor of Spotify, particularly when they already have alternatives in the other services," Pachter said.

When Pandora reported its most-recent quarterly results, in May, the Oakland, Calif-based company said it had almost 52 million "active users", who put in more than 3 billion hours worth of listening on the service during the quarter. Pandora reported sales of $80.8 million in the quarter, with $70.6 million of that coming from advertisements.

Pachter said that from an investment standpoint, "We don't think that listener metrics are what is driving the stock now. Increased emphasis on advertising sales is the driver of [Pandora's] recent share price appreciation, and we expect it to be for the next year or so." Pandora's stock has risen 43% since falling to a 52-week-low of $7.83 on April 18.

Pachter added that he does expect Spotify to work hard to compete with Pandora, "which could cut into Pandora's growth over the near term." However, Pachter isn't sold on what Spotify is bringing to the Internet radio market.

"Clearly, if Pandora loses listeners, its stock will be punished, but given that the Spotify's offering is a 'me too' clone, we don't expect it to have much of an impact," Pachter said.