Shares of Pandora Media Inc. snapped downward Thursday after a report said Apple Inc. and major music companies had intensified talks about starting a new music service early next year.
THE SPARK: Bloomberg News reported that Apple and the record labels were in talks about offering a new music service to Apple device users as the growth in song download sales is tapering off. It published a similar report in September.
The latest report came two days after Apple unveiled a new iPad line-up for the holidays, including its smaller, less expensive iPad Mini, but did not announce any new music offering. The lack of the announcement on Tuesday may have contributed to Pandora shares gaining 8 percent that day.
THE BIG PICTURE: Several companies such as Sweden's Spotify and Rhapsody in the U.S. offer subscription music plans for $10 a month that allow unlimited playback of songs on mobile devices. Subscribers don't need to pay individually for downloads, but lose access to the music once they stop paying the monthly fee.
Microsoft Corp. even offers such unlimited song selection and playback for free on its new Windows 8 devices, including those on tablets such as its own Surface, which is available in its stores on Friday.
A variety of new digital music entrants have spooked investors in Pandora, which runs a free music streaming service on computers, mobile devices, stereos and car audio systems and is the leading provider of so-called online radio in the U.S.
Pandora's streaming radio business relies on government-regulated licenses with music companies. To qualify for the mandatory licenses, the company must prevent the listener from being able to pick the exact song or album they want and limit the number of times an artist can be played each hour.
Apple would not need to discuss anything with music labels to start such a service since such licenses are issued through regulations if the playback conditions are met.
Its reported direct talks with the record labels suggest it is seeking a service with more active user involvement along the lines of Spotify, Rhapsody, MOG and others.
Apple spokesman Tom Neumayr declined to comment. Pandora spokeswoman Amanda Livingood also declined to comment.
THE ANALYSIS: Barrington Research analyst James Goss said the market reaction was "knee jerk" and said Pandora shares were trading in a volatile range due to the "rumor du jour."
"All of these various slices of music are all competitive in many ways," he said. Goss said that Apple's reported talks do not mean it could find a better way than others to improve its mobile advertising business, especially since other companies including Pandora, Google Inc. and Facebook Inc. are all struggling with the issue as consumer activity on mobile devices increases.
SHARE ACTION: Pandora shares fell $1.09, or 11.7 percent, to close at $8.20 on Thursday. They rose 37 cents to $8.57 in after-hours trading. Shares have swung in a big range between $7.32 and $15.97 in the last 52 weeks.