I don’t think $P’s business model works. Their costs continue to grow at a faster pace than their revenues. This is especially true in regards to their content acquisition costs, as you can clearly see in this spreadsheet.

It’s going to be real tough (even without worrying about competition) for them to turn consistent profits.

To make things even worse, if they somehow make the model work (they have been lobbying Congress to establish fair royalty rates) and achieve profitability, they’ll begin to face more and more competition.

If you think Porter had his way with Netflix – Netflix, meet Porter, you should see what he would do to Pandora ($P). Talk about few barriers to entry. Spotify, $MSFT, $AAPL all have encroached into $P’s territory without much in the way of capital investments.

I think it does make sense for companies like $AAPL & $MSFT to compete in this seemingly nonprofit industry, because this will help build their ecosystem. (Similar to $AMZN with Prime & breaking-even on Kindles.) The more $AAPL & $MSFT have to offer in regards to features like music, movies, & connectivity – this would make their products more sticky.

$AAPL & $MSFT don’t need to turn a profit on this specific division. I don’t think $P can say the same.

Bottom line, they’re damned if they do, & damned if they don’t.

- MicroFundy