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Pandora shareholders hear Apple's footsteps; stock tumbles

Shares of the online music service have taken a nosedive following a Wall Street Journal report that says Apple is planning its own similar service.

Pandora has already run into trouble as investors digest reports that Apple may launch a rival music service.

As of 9:45 a.m. PT, Pandora shares had fallen more than $2, a 17 percent drop.

The freefall follows a story in yesterday's Wall Street Journal that Apple is aiming to kick off its own online music service. Sources told the Journal that Apple is speaking with record labels to license music for a service that would let users create their own custom music stations based on their favorite songs and artists.

The service would reportedly be targeted for the iPhone, iPad, Mac, and possibly Windows, but not Android devices. Like Pandora, Apple's service would be free and bring in sales by displaying advertisements through Apple's iAd, according to Citi analyst Mark Mahaney.

The Journal's sources said Apple is trying to negotiate different licenses to offer users greater interactivity than what is currently available through Pandora.

An analyst with Bank of America Merrill Lynch says Apple's entry into this market "could shake up the sector," according to AFP.

"Apple is currently the largest music retailer in the world and the move is likely being made to unseat rapidly growing streaming competitors like Pandora and Spotify," analyst Nat Schindler said in an investors note.

The analyst believes Apple's move is aimed more at Spotify than Pandora. However, the competition could hurt Pandora as the company currently sees around 40 percent to 50 percent of its usage from iOS devices, Schindler wrote.

Of course, competition is nothing new to Pandora, given the way Spotify, Grooveshark, and similar online music services have flooded the Internet. Pandora is still top dog, accounting for around 75 percent of online radio listening, Mahaney said. And the company is ahead of the game in other ways.

"Two advantages that Pandora appears to hold are ubiquity, with integration into roughly 650 devices (including all Apple's Mac and iOS devices -- though perhaps this could now be at risk), and a modest head start in rolling out local ad sales offices, which improve premium sell-through and mobile monetization rates," Mahaney noted.

But Apple holds a wide audience, many of whom could easily gravitate to a free service from the company, especially if it offers advantages over Pandora and the others.