Buying Stock in the World's Most Misunderstood Company

On Wednesday (as seen on my Briefing.com feed), Barclays trotted out the tired, old competition line as reason to be cautious Pandora. The house cited Amazon.com's(AMZN) announcement of its Cloud Player for iPhone and the emergence of Internet radio company Songza as threats that "could take share, potentially slowing P's active listener and listening hours growth."

I would never go so far as to say Pandora does not have competition. In fact, I probably use a broader definition of competition than most people. I consider everything from Sirius XM to YouTube to iTunes competition. If you're using something other than Pandora for some form of entertainment, even video content, you're not using Pandora and, in some respect, it loses. But that's just one area of the fight.

Pandora has never contended that its growth would not slow. While it chooses to use the word "moderate" over slow, for obvious reasons, it does not expect to extend its reach to every warm body in the United States. A slowdown in growth is not necessarily a bad thing, particularly when you take into account the present terms of Pandora's music royalty situation.

In theory, we all have access to an infinite audience. On the ground, however, it does not work that way. When you consider Pandora, it's best to consider it within the context of traditional radio because -- and here's the key -- it's going after the $14 billion radio advertising market. From a revenue standpoint, it's not crazy to say that nothing else matters. This is what people like Greenfield, the suits at Barclays and other analysts tend not to bring up or, worse yet, understand.

Radio stations have never been able to capture entire markets. The nation's most famous talk show host, Rush Limbaugh, only reaches a fraction of the population. Radio stations -- terrestrial ones or Pandora -- go through various stages of growth. Because it rolls more like a tech company than a radio station, Pandora continues to experience the type of hyper-growth we associate with Internet companies. It would be illogical, however, to not expect this growth to ebb and flow and, at times, stagnate a bit. This will happen with or without Amazon, Songza, Sirius XM, Spotify, whatever. It's a reality of the business.

Pandora most resembles a traditional radio station in that it needs to achieve scale -- or critical mass -- and, concurrently, maximize the size and loyalty of that audience. It needs to build a stronger connection with the listeners it has. That's how you drive ratings. And that's how you secure advertisers.