Is Pandora's Moat Really That Small?

If you thought Sirius XM posed the most significant threat to Pandora Media  (NYSE: P  ) , think again.

Shares of the streaming music specialist plummeted 11% Monday, then followed up with an additional 5.5% drubbing Tuesday after The Wall Street Journal reported Apple (NASDAQ: AAPL  )  had just signed a licensing deal with Warner Music. Of course, that wasn't particularly bad news for Pandora investors until it was noted that Apple is also launching its own streaming music service, aptly named "iRadio."

Worse yet, Apple generously agreed to give the folks at Warner a 10% cut of all ad revenue, making Pandora's mere 4% slice look downright greedy.

As fellow Fool Alex Planes pointed out, Apple certainly doesn't need iRadio to make it any real money -- at least directly, anyway -- especially considering the Cupertino-based company managed to grow its cash balance by 5.8% last quarter to a ridiculous $145 billion. To the contrary, it's safe to say Apple is simply looking for another way to draw in more iPad, iPhone, and iPod users to its world-class ecosystem.

When drawbridges aren't necessary
Of course, that raises the question: Is Pandora's moat really so small that a tech giant like Apple could simply step across to destroy its castle?

Perhaps more important, can Pandora survive as it struggles with the seemingly simple task of turning a profit?

After all, while Pandora did boast record first-quarter revenue, which grew 55% year over year to $125.5 million, the company still managed a non-GAAP loss per diluted share of $0.10. What's more, Pandora provided little reassurance with its guidance for the remainder of the fiscal year, which calls for somewhere between a non-GAAP per-share loss of $0.02 and a per-share gain of $0.08.

Crushing the little guy?
Equally unsettling for Pandora investors is the fact that Apple is no stranger to putting smaller outfits out of business. Take BeamItDown Software, for instance, which had achieved 6 million downloads of its iFlowReader book-reading software for iOS by the middle of 2011.

Around that time, Apple instituted a 30% royalty on the sales price of all books sold through its platform, effectively forcing the folks at BeamItDown to operate at a loss in one fell swoop, and ultimately causing the the app-maker to close its virtual doors. 

All is not lost for Pandora... yet
Now, that doesn't mean Apple ruthlessly sets out to force small businesses to fail; the increased royalty move certainly made sense for Apple from a broader business standpoint, and the company is under no obligation to prop up the low-margin operations of those who rely on its enviable empire.

It does, however, highlight the fact that one of Pandora's most significant risks lies its overreliance on a comparatively narrow scope of operations in streaming music.

That's also not to say Pandora won't eventually be able to achieve sustained profitability, especially when we remember Apple hasn't even launched iRadio yet. In the meantime, Pandora already enjoys a huge head start with 70.1 million active listeners, and the company added more than 700,000 paying subscribers to its ad-free Pandora One service last quarter alone. All told, that brought the total number of paying Pandora One subscribers to more than 2.5 million.

Foolish final thoughts
As our lives become more connected through the ever-increasing number of Internet-enabled devices around us, Pandora is undoubtedly becoming more pervasive by the day as users listen through smartphones, home theater systems, and car stereos alike.

Time will tell whether it can survive over the long haul, but, for now anyway, Pandora's demise at the hands of Apple is far from assured. In the short term, at least, Monday's drop may prove little more than a knee-jerk reaction.

A deeper dive into Pandora
Pandora has won millions of devotees among music fans but few supporters on Wall Street. The online jukebox seems to be redefining the way we consume music, a transformation that's only likely to grow. But high royalty rates and competition from all corners threatens to silence the company. Can Pandora translate success with its listeners into a prosperous business model that will deliver for investors? Learn about the key opportunities and potential pitfalls facing the upstart radio streamer in The Motley Fool's premium research report. All you have to do is click here now to subscribe to this invaluable investor's resource.