Sirius XM Investors Shoudn’t Worry About Apple’s iTunes Radio Just Yet

by Trefis Team
-2.33%
Downside
3.57
Market
3.49
Trefis
SIRI
Sirius XM Radio
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Quick Take

  • Apple will soon launch its Internet radio service, iTunes Radio, which is similar to Pandora’s in many aspects.
  • With a large music library, push towards automotive integration and a strong relationship with existing iPhone and iPad customers, Apple can potentially give Sirius XM some competition.
  • However, Apple’s new radio service seems to lack Sirius XM’s programming diversity.
  • Additionally, the company seems to have copied Pandora’s business model after failing at its own attempts at innovating music delivery, implying it doesn’t have much competitive advantage apart from having a bigger library.
  • Automotive manufactures will love more competition in the radio space and that implies that Apple may not get preferential treatment.

Apple (NASDAQ:AAPL) recently announced its Internet radio service iTunes Radio, which will offer several features similar to that of Pandora, including personalized radio stations, a free ad-supported service as well as the option for ad-free subscription. [1] While this implies some serious competition for Pandora, Sirius XM (NASDAQ:SIRI) may not be immune either.

Sirius XM is the only satellite radio provider in the U.S. and has done extremely well over the last couple of years on growing automotive sales, improving new car penetration rate and a sustained new vehicle conversion rate. On the surface, it may seem like there is little direct competition between the company and Apple’s iTunes Radio, but it is Apple’s ambition of integrating its services and devices with in-car systems that might be of concern to Sirius XM. The technology giant is in talks with several automotive manufacturers, including Honda, Nissan, Volvo, Mercedes, Jaguar, Hyundai, Kia and others, to integrate its iOS7 operating system.

Apple’s service will give its users access to its entire iTunes catalog which boasts of over 26 million songs. In addition, the subscription fee for iTunes Radio (at $24.99 per year) is much lower than that for Sirius XM, which charges $14.49 per month for its basic service. With seamless integration across different iOS devices and strong financial muscle, Apple has the potential to make a dent in Sirius XM’s growth. However, there are certain areas where Sirius XM still has an advantage. Whether that advantage will be good enough to stop Apple or not remains to be seen.

See our complete analysis for Sirius XM


Advantages for Sirius XM

Programming Diversity

Besides regular songs, Sirius XM also provides other programming including talk shows and sports broadcasts, which is why it also charges more than other radio services in the market. Almost half of radio listening occurs inside the cars and listeners find such unique content appealing as they drive. For instance, news shows can be quite useful while driving to the office in the morning, and sports enthusiasts can stay abreast with live games via Sirius XM’s radio service. Apple doesn’t seem to be offering anything similar for now and may focus only on songs initially.

Lack Of Innovation – There Is Nothing New With What Apple Is Doing

Apple won’t find it easy to create a profitable business as royalties for Internet radio are fixed by intermediary bodies, and Internet webcasters do not have much flexibility to negotiate. Additionally, the company had to pull the plug on its music social network Ping and the iTunes Match feature hasn’t done too well either. In other words, it appears that Apple is struggling to find the right fit for music listeners and after some desperate attempts at innovation, it is more or less copying Pandora’s business model. What this essentially indicates is that Apple is entering this business with no significant superiority in terms of technology or the way the service will be delivered.

It appears that Apple is not doing anything new and Pandora has been offering the same service for a while now. Yet, the Internet radio company hasn’t been able to stop Sirius XM’s growth. Can Apple do what Pandora could not? We believe that the automakers would prefer to have multiple radio services competing for automobile integration in order to maximize their own profits. This implies that Apple may not get a preferential treatment and Sirius XM may still have a lot of room for growth.

Our price estimate for Sirius XM stands at $2.61, implying a discount of 20-25% to the market price.

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Notes:
  1. Apple Announces iTunes Radio, Apple Press Release, June 10 2013 []
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  • commented 1 years ago
  • tags: SIRI
  • A financial analysis that understands that less than half of the SIRI programming is music! How refreshing.