Sirius XM, Pandora, And The Rocky Effect
As someone who follows the audio entertainment sector closely I often make it a point to expose myself to services that are competitors of Sirius XM Satellite Radio, as well as keep my finger on the pulse of what other people are doing. It is simply the prudent thing to do. Much to the frustration of many Sirius XM fans and investors I write about these other services and point out the positives that services such as Pandora offer. My opinions are oft met with some criticism from investors who want to know how Spencer Osborne, a loyal satellite radio fan, could possibly go to the “dark side” and how dare I mention that these services are good or even close to Sirius XM.
The recent events in audio entertainment remind me of the movie Rocky III. In the film Rocky is at the top of his game. He is world champion, has endorsement deals, and is the toast of the town. He is about to announce his retirement when Clubber Lange (played by Mr. T) publicly challenges the champ to a match. Rockey accepts and proceeds to get knocked out in the second round losing his championship belt. Rocky was simply too high on himself. That however is not the end of the story. Rocky comes back with the help of Apollo Creed (the man he bested in the first Rocky movie) and reclaims his glory by knocking out Lange. You see, it was Apollo Creed that took Rocky back to his roots of what made him great. It was a hard lesson learned, but in the end it made Rocky even better.
Sirius XM is on top of the world right now. They are installed in about 60% of new cars manufactured, have the best content available anywhere, and generate a ton of revenue. The bad news is that at this years Consumer Electronics show this year Sirius XM was barely present and let Internet Radio as well as HD Radio steal the spotlight, and in effect challenge Sirius XM’s position of superiority. HD Radio pumped out about a dozen press releases and Internet Radio companies such as Pandora were present in a huge way. To top it off Sirius XM shock Jock Bubba The Love Sponge defected to Internet Radio service Radioio. It almost seems like Sirius XM was complacent and without worry as these would be challengers stole the show and landed punch after punch without as much as a peep from the satellite radio provider.
The burning question is whether Sirius XM will step up to slap down these competitive threats in the same way Rocky took back the championship that was rightfully his at the end of Rocky III. Sirius XM has several distinct advantages that should allow it to take back the thunder other took at the consumer electronics show.
Satellite Delivery
While expensive to launch, satellites deliver the content to consumers. There is not clogging of networks, and drop-out are virtually non-existent. These satellite cover the entire northern hemisphere, and a new consumer does not mean a new expense to the network. In fact, the opposite is true. Each new consumer makes the satellite delivery network less expensive. The satellite network, and associated bandwidth are commodities which simply can not be matched by cell networks facing challenges of delivering content with speed as more and more people migrate to smart phones. Satellite Delivery is high quality and consistent. More and more cars are capable of receiving it, and in the end it is this high quality feed that delivers advantages cell carriers can not yet match.
Internet Delivery
Internet deliver? Sirius XM has that as well. In fact, it is an area where the company can provide vast improvements. While oft overlooked, Sirius XM offers an Internet delivered platform. They can compete head to head with Internet services such as Pandora on the same turf. The question here is whether the company will step up and deliver satellite radio 2.0 with features that outshine the customization offered by most Internet radio companies. The new media player that will be offered by Sirius XM looks very promising, and should deliver Pandora like features. While Sirius XM’s Mel Karmazin downplays the Internet side of the business, it should not be ignored. Instead, it is this aspect that could enable Sirius XM to deliver a knock-out punch. Now that Stern is available on cell apps, and the company was successful in getting Internet streaming of NFL games, they only need to add customization and on demand type functionality to deliver the best content on apps as well.
Strong Brand Recognition
Sirius XM is a strong brand. The company has demonstrated success, and has proven to the top tier talent that it is with Sirius XM that they will get the best and most exposure. Pandora also enjoys strong branding. They have deals that Sirius XM lack. Should Sirius XM get onto the same turf as Pandora with similar functionality and better content, the battle may indeed be won. Most, if not all, Internet Radio providers will likely shift to a fee based subscription service. At that point it becomes a question of cost vs. consumer value. The bigger brands will be the players to watch.
Superior Cash Flow
Sirius XM, with over 20 million subscribers, enjoys a massive cash flow. This allows the company to attract the superior content while at the same time invest in their networks and delivery options. While many Internet radio company are getting by, they are not raising the type of cash needed to get their content offerings to the next level. Sirius XM does not have this problem.
Ease Of Use
Getting satellite radio, for the most part, consists of buying a car and turning on the radio. Yes, smart phone connectivity is on the upswing, but smart phone adoption is still in its infancy. With apps, there is a requirement to get a smart phone, link it to your car, and then listen. Believe or not, that extra step is enough to take many consumers out of the mix. Consumers want simplicity. At this point Pandora’s most seamless integration into a car is likely in Ford’s SYNC system. For those worried about buffering, it is not an issue in metro ares where the vast majority of consumers reside.
To me the key for Sirius XM rests with updating and upgrading their Internet Radio options in order to level off that segment of audio entertainment. While satellite radio investors will not want to hear this, for music I stream Slacker while at a computer more often than I stream Sirius XM. Simply stated, it gets me the music I am in the mood for in a more effective manner. I would say that nearly half of my audio entertainment desires are filled with iTunes or competing services. Sirius XM needs to get that number to swing to 75% to really reap the growth factor investors are seeking.
Sirius XM got bested at CES. It is now time to deliver what Satellite Radio 2.0 is all about as well as upgrade their streaming services. The pieces to recover from this small setback are there. It is simply a matter of time before the company rolls out their upgraded services.
Position – Long Sirius XM Satellite Radio
Content is the key. The world of finance following Lehman makes it much much more difficult to pull off what Sirius did…and quite frankly almost did not do. Karmizan will not spend money to create hype. He will let the content speak for itself. I continue to compare Sirius to ESPN. Content…Subs..Revenue….Repeat. ( with a price increase every year)
Obviously there is no comparison between what Pandora and Satellite radio provide, however
when it comes to music listening all i can say is that my girlfriend works as a prop stylist in the photography field and most of the studios where people do their photography tune to Pandora for their background music.
She had no idea that you could get satellite radio on the internet (maybe thats my fault considering we have satellite radio and I own the stock) and most other people probably have no idea about satellite radio’s internet service as well. She did know of ONE of her photographer friends who played Sirius in her studio.
In addition i was just upstate with some friends and they were using Pandora at their home as well. The low down is that the “play list” that is created when you start with a particular artist can be hit or miss. They seemed to know which artists worked the best.
In my opinion its long past duet for Sirius to enable its listeners to program a playlist similar to what Pandora allows you to do.
Spencer,
I appreciate the depth and logic of your post. All points are sensible to me. Competing with Sirius in the auto (craft, motor cycle, and any other vehicle) is very very hard for obvious reasons from content to infrastructure and reach and quality of the signal. It is obvious from your piece “why”. Sirius has covered a huge and very tough road to get where it is now. Everything seems to be in place for siri to blast forward. And I have zero doubt that they will. I believe 2011 and in particular 2012 is when competition will start feeling serious squeezing from siri. Siri’s cash positions as well as auto and after market penetration should start producing impressive impact. I am very curious about siri’s Q4 2010 and Q1 2011 results because they will be very characteristic of what to expect in 2011 and will lead into 2012. I have not seen any projections from you. It would be great if you could share your opinion at least about subscriber gains
The owner of Pandora himself said that Sirius will be around for a very long time to come. Pandora has helped SIRIUS XM a lot it allowed SIRIUS and XM to merge since it was portrayed as a viable competitor.
Buying SIRI now is like buying AAPL during 2001 or MSFT in 1995!
Based on my own unscientific study, I believe that only about 10% of Pandora listeners actually listen on a regular basis. I talked to 10 people who have signed up for Pandora and only one of those 10 listen multiple times per week. Seven of the 10 have not listened in over a month.
I can’t see Pandora being able to retain the people who sign-up for the service unless they have compelling content that goes beyond commercial free music.
The average user listens for 11.6 hours per month. They have made that public, for what it’s worth.
Average listenership in about a year has shot up to 125 million registered users who listen for an average of 18 hours per month.
http://www.usatoday.com/tech/c.....52623102/1
Would it be possible for Sirius XM to offer some sort of “on demand” feature for music and other programming that could give Apple (and others) a run for its money? Instead of purchasing downloads for $1+, subscribers could access any song/program in the Sirius library at any time, anywhere. This content couldn’t be saved or stored on the device receiving it, but it wouldn’t need to be. Perhaps this feature could be added as a premium tier of Satellite 2.0? This plus a discovery tool similar to Pandora’s would seemingly be game changers for how we listen to radio.
This on-demand feature is what a lot of us are hoping for in 2.0. I don’t know if record companies or publishers would get on board? Would the royalty fee we already pay be enough? I do think people would pay extra a month to have a juke box channel on sirius/xm that would give them access to the whole library whenever and wherever. This would be a game changer. My concern is that 2.0 will be weak and we’ll all be let down. Fingers crossed.
While Internet radio was just a blip on the radar, people said that terrestrial would beat Sirius, because who would pay for what you could get for free. Well, Sirius crushed terrestrial radio and signed up 20 million plus paying subs. Sirius is growing, while terrestrial is dying. Why? Better content. No commercials. No censorship. People will pay for quality. Meanwhile terrestrial, like newspapers and other ad based media are losing advertisers in droves. Sirius has the better business model. They have figured out how to monetize content in this new Internet age we live in.
Now here comes Pandora. It’s “free”, it’s private, and it’s getting alot of buzz. The shorts and Sirius bashers have replaced terrestrial radio and are now pointing to Pandora as the Sat radio killer.
But here’s the thing….it’s not making money! Not Sirius money. And when it goes public, which is the rumor…it will no longer be able to hide that fact. It will become painfully clear that it doesn’t have a viable business model. Free may sound great….but on wall street, which is all about the bottom line, and shareholder value…it’s the kiss of death.
Pandora will have to do one of two things:
1) increase the number of audio commercials it plays between songs by ALOT to bring in money. If they do this however, they fall into the terrestrial trap, and why people are willing to pay for Sirius(besides for the great content)
2) move to a subscription based model like Sirius. But WITHOUT all the exclusive Sirius content like Howard, Live music, sports, talk, comedy etc. Given a choice between paying for music only and music and tons of other content….I think people will choose having more choice…which they would get with Sirius. Not to mention more reliable reception and better sound quality.
I agree with others tho, Pandora is competition. Sirius needs to make more inroads with it’s Internet presence and smartphone market. Which should be addressed with Sat Radio 2.0
Cause let’s face it, if Sirius can add the personalized features of Pandora into Sat radio 2.0, they will have the best of everything. It’s alot easier for Sirius to do this than it is for Pandora to get into the car and try to match Sirius’s content. They can’t!
Internet radio has more of a challenge to effectively compete than Sirius. Doesn’t mean Sirius can rest on their laurels. Competition is good for business and the consumer. Sirius is in the better position to capitalize, and I have every faith in Mel that he will.
Boo-yah!
It is naive to believe that pandoras will be able to avoid significant subscription business if they are really going to show their investors any money. The question is how much they are going to charge and if they are going to be competitive. They will find themselves between the rock and the hard place in a subscription situation that will be is some ways very similar to sirius and xm before merger when they were destroying each other’s business while competing for content providers and auto contracts. They will be competing not only with sirius but also among themselves. We will witness brutal annihilation of internet music providers similar to what happened with competitors of amazon.com in the 90’s. I am confident that sirius xm will end up being the only true amazon.com of radio. This status was earned at a very high cost and near bankruptcy pains but the worst is over and the company is gaining momentum every day. These arguments are supported by several factors:
a. both space and ground infrastructure are in place and starting 2012 though 2018 capex is going to be insignificant. The company is already 100% in control of radio signal delivery.
b. siri has no and I doubt will ever have true competition in the auto with contracts signed with every auto company in the United States;
c. siri has signed dozens of contracts with virtually all major sports organizations, news outlets, dozens of celebrities and radio personalities. As the result siri is control of its amazing and dominant content;
d. siri has over 20M paying subscribers and the number is growing at a high rate that speaks volumes about its brand recognition.
e. according to the company, 70% of income from every new subscriber goes to the bottom line, which is absolutely huge.
f. SAC is gradually shrinking and ARPU is going up.
g. the revenue is growing over 20% and the company is already profitable with profit margin in the next two three years estimated as high as high as 20% to 30%.
h. the company will have deep pockets and will be able to compete very strongly on the radio market.
i. the company will have much better chances to innovate due to very strong cash resources.
I believe that the company is on the verge of very impressive growth and profitability that will help it compete successfully with any other provider. We are about to witness true surge of siri business. Everything is in place for this to happen. This is literally a matter of months.
I really liked the article. In any business you need to keep an eye on your competitors. Siri also needs to keep the “Eye of the Tiger” (Rocky III) so they can stay on top.
The only thing I disagreed with in the article was that Rocky did not “best” Apollo in the first Rocky movie. Rocky went the distance, but lost a split decision in the first movie. Rocky did beat Apollo in the Rocky II.
The “ease of use” factor really is important for many of us. I have a portable Sirius set so that I can use it in my car and in my home audio system. I just had to upgrade my computer and audio system within the past two months. How easy was it to get Sirius after the upgrades? I just plugged in my portable set as usual – no software downloads, no upgrades, no extra subscription fees, and no hassle…period. Yes, if I wanted to listen through my computer, I would have a download. But I prefer the sound quality through my home audio system, and having the Sirius dock there makes things easy.
And, as someone who does not live in a major metro center and who travels frequently in areas with spotty cell coverage at best, I appreciate the quality of service from Sirius.
Where is Pandora’s edge when users start having to pay for hogging large chunks of bandwidth? It isn’t.
Anone who thinks about it at all will realize that Sirius didn’t have to worry about CES because they really don’t have any competition at this point — and Sirius has the edge for more than one reason.
Long SIRI, and Siriusly addicted.
Spencer come on! Sirius b2b customer is the auto industry. They don’t need to see presence at the CES. What happened, did you sell early? I think you’ve missed the whole come back story. Remember when SIRI was left for dead and is now at $1.58, with every metric – sub growth, SAC, rev/sub, debt all moving in the right direction. You think Pandora is going public because they are loaded with cash? Come on.
You’re trying to hard to be objective. Sometimes the truth is that the scales are tipped strongly to one side.
This article should go in the “whatever helps you sleep at night category.”
Tony,
I do not trade this stock. I sold the bulk of my holdings in the $7’s long ago. Once I started writing about Sirius XM I stopped trading it. I do have shares, but never trade. I made my money. I sleep fine because I know that my sentiment on this equity is not impacted by my bottom line.
Good on ya’ for your integrity, Spencer, but I still maintain that your understanding of satellite radio needs improvement. Nicholas Negroponte had good reason for stating years ago that mobile applications and satellites are the best fit, and his reasons are just as valid today – perhaps even more so, given that data usage charges seem to be in the future for those using Pandora and other implementations.
I was an XM subscriber for about 2 years, from ’06 to ’08. I liked the availability of a wider variety of music than the local ClearChannel Top-40s.
However… Since 2009 (when I traded the car that had the XM receiver), I’ve been a Slacker subscriber, and in early ’10 bumped it up to the Slacker Plus ($4.99/mo). I’ve found the following advantages for my uses:
1. I can listen in different places. Home PC, on my iPhone while jogging or working out at the gym, on my home PC, and of course, in the car.
2. Greater flexibility. I never have to be subjected to Pearl Jam. I can skip through as many songs as I like until I find the one I want. I don’t listen to sports or much talk besides NPR and various podcasts, and I can get those through iTunes, terrestrial radio (is there anywhere without a local NPR station?), and Stitcher Internet Radio, also on the phone, computer, etc.
3. XM seemed to have multiple stations with almost the same thing. It may have changed, but they didn’t have a Ska station, something I really wanted. The lower demand stations had terrible audio quality – again, maybe they’ve improved the compression, but it sounded like way under 48 kilobits/sec.
4. Slacker lets me build custom comedy stations. XM had a couple of comedy feeds, but it was always a big mixed bag.
5. With station caching, poor coverage isn’t a huge issue, and there tends to be good cell coverage in urban areas and most roads I drive when travelling (i.e. major highways).
6. Features – it’s nice to be able to pull up artist bios, lyrics, and jump straight to iTunes to purchase a track if I really like it.
7. Cost – I’m already paying for Cable internet. I’m already paying for an iPhone with a datapackage. Why invest more equipment, a full Satrad installation, to get what I can pull through my phone very cheaply. My phone is already connected to the receiver through a USB port. I start Slacker, and it immediately cuts off the iPod playback and switches to the Slacker feed.
For me, there’s simply not enough in Sirius/XM to justify it. I realized just how much I like it while driving a rental car for a month while on an extended business trip back in March. The car had Sirius loaded already, but after being annoyed with no skip function, I bought a patch cord so I could continue listening to my customized radio stations.
I know a lot of people who love satellite radio, but for me, after using both, streaming Slacker turned out to be a much better fit for my life.