Sirius investors should heed the Pandora challenge

By Rob Cox
October 5, 2010

Sirius XM Radio boss Mel Karmazin doesn’t seem too concerned about the surge in online radio. At least he doesn’t think it represents an immediate threat to the U.S. satellite radio monopoly he runs. He may be right. But he should keep a close eye on upstarts like Pandora and Slacker.

The mojo is back at Sirius. Shares have more than doubled in price this year, giving Sirius a robust $5 billion market cap. The rebound in U.S. car sales — to an annualized rate of more than 11 million — will swell subscriber ranks to more than 20 million this year.

Considering Sirius needed a rescue from John Malone’s Liberty Media 18 months ago, this is a stunning turn of fortunes. But investors, who have stampeded into the stock like Cincinnati fans to a Who concert, need to take note of the Pandora challenge.

The online streaming service, which allows users to customize channels to suit their musical tastes, has 65 million registered U.S. listeners. Its iPhone application alone has about as many users as Sirius has subscribers. Most importantly, technology is making it far easier to access Pandora and its ilk in the car, where half of all radio listening occurs. Ford Motor now allows drivers to activate Pandora stations from their smartphones using simple Bluetooth commands.

For now, Sirius still has the edge. Its 130-odd channels offer not just music, but also news, comedy, sports and talk radio. It’s hard to know how important this variety is to Sirius; the company doesn’t break out listenership figures.
Pandora, for now, remains strictly music. But it has eager backers, including Bono’s Elevation Partners, which bought around $100 million of Pandora’s shares on the secondary market in August. It’s conceivable Pandora might one day endeavor to offer exclusive content.

That might change the competitive dynamics. While Sirius is confident it could out-Pandora Pandora if needed, another option would be a defensive deal. True, the company’s $2.7 billion of debt — 4.5 times EBITDA — gives it little room to buy Pandora or any of its copycats. But Liberty has deep pockets. Given Karmazin’s recent success, Malone might be more than willing to finance a transaction — and increase his control over Sirius.

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Although I have previously been bullish on Sirius XM on my blog ProofTrader, I have just discovered Pandora and am trying to figure out if there is any way to buy in. Not to say that Pandora will be the end of Sirius, but for instance I might cancel the $2.95/mo I currently pay to Sirius for premium internet and instead give that money to Pandora for their ad-free higher quality service. Similarly priced at $36/year. But what if I could then get Pandora in my car without having to use my phone? I am enough of an audiophile to want *both in my car really, but many people would opt for Pandora at that point. So I agree with this article, in that Pandora will eventually make a big splash.

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