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Social media stocks have been having a rough year. Early hopes that this new area of the market would grow and grow and grow have been challenged. And now there is another reason to be worried: While social media stocks have occupied a nice niche in the business landscape, that niche is easily invaded by competitors.

At least, that might be the takeaway from Pandora Media Inc.'s 17 per cent freefall on Friday. Pandora is an online radio company, providing the tunes that consumers can stream over computers or mobile phones, building their own listening preferences. It was among the first wave of social media companies to go public, raising $235-million (U.S.) in an initial public offering in June 2011.

It has been a bumpy ride since then: The shares rose nearly 9 per cent on their first day of trading, then fell 24 per cent on the second day. More than a year after their debut, the shares trade 35 per cent below their IPO price.

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The latest bump comes as the Wall Street Journal reports that Apple Inc. is planning to introduce its own competing online custom radio service – a credible threat given Apple's strong presence in online music – through it iTunes service. According to the report, Apple is already in discussions with companies over licensing music.

Dow Jones reported that at least one analyst is standing by Pandora. "Rolling out these services is a challenge, and we think Pandora will compete," said Richard Tullo, an analyst with Albert Fried & Co. "Looking at the bigger picture, Apple's move validates Pandora's business model."

Investors appear to have another approach: Run. Meanwhile, Apple shares were up 0.8 per cent in afternoon trading, after touching a record higher earlier in the day.

The fear regarding Pandora is likely related to the fact that while social media companies offer interesting services – from offering streaming music, to providing group discounts (Groupon Inc.), to offering social networking (LinkedIn Corp.), to giving look-how-great-I-am updates (Facebook Inc.) – these services aren't that hard to replicate by competitors.

Maybe Pandora can withstand the threat from Apple, but the market is betting that it is not going to come out of the encounter unscathed. And if a company is that vulnerable to competition, you have to wonder why anyone would invest in it in the first place.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More


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