Sirius XM Shouldn’t Worry About Its Free Music Counterparts

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Sirius XM

Sirius XM (NASDAQ:SIRI) is the only satellite radio provider in the U.S. and has close to 25 million paying subscribers. The company’s subscriber base has grown steadily over the past few years despite heightened competition from free music streaming players such as Pandora Media (NYSE:P) and Spotify. While the vast reach of free music streaming services appears threatening for Sirius XM, there are a few aspects that keep it some way ahead of its free music streaming counterparts.

In addition to music, Sirius XM offers a variety of other content such as talk shows, news, sports shows etc., the full range of which is a disincentive to switch to a streaming-only alternative.  The satellite radio provider’s business is much more sustainable than free music services, which indicates that while Sirius XM is well equipped for the long run, the future of free streaming services is somewhat uncertain. To this end, the most recent example is the proposed rise in royalty rates for Pandora, that has put a question mark on its future profitability. In addition, Sirius XM still has substantial room for growth in form of the used car market, which should ensure that its subscriber growth is not be affected by what free music providers are doing.

Our current price estimate for the company stands at $3.58, implying a premium of less than 5% to the current market price.

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See our complete analysis for Sirius XM

Sirius XM Targets a Different Market with Better Content

Sirius XM’s key selling point is that it offers diverse and unique content spread over numerous channels comprising commercial free music, sports, talk shows, news stations, etc.  Since the satellite radio provider’s business model is based on subscription fees, it is able to afford unique and exclusive content that separates it from other radio services. An example of its high quality content is The Howard Stern show hosted by the National Radio Hall of Famer, Howard Stern. On the other hand, players such as Pandora, Spotify and Songza only provide music to their listeners. Their unique selling points are centered on their abilities to build the most relevant playlists for users. Although their playlist building algorithms and music curation has boosted their subscriber growth, people interested in news and sport shows must look elsewhere for this content.

While difference in content places Sirius XM in an advantageous position, it also indicates that the satellite radio provider and music streaming players are serving partially discontinuous markets. One market comprises individuals who are ready to pay in order to enjoy commercial free music and news and the other one encompasses individuals who do not mind advertisements as long as the service is free. Also, the main target market for Sirius XM is listeners in their cars, while free music providers go after smartphone and PC users. Therefore, we believe that there is enough room in the market for Sirus XM and free music streaming players to co-exist. However, Sirius XM needs to watch out for Pandora’s venture in the new car market. In January 2010, Pandora joined hands with Pioneer, an electronics manufacturer, to offer Internet radio in cars. [1] For the current year, the company had plans to launch its Internet radio in 135 different car models from 26 auto manufactures. [2]

Free Music Streaming Services have Low Sustainability

Free music streaming services such as Pandora generate the bulk of their revenues from advertisements, while Sirius XM relies on subscription fees. By looking at revenue metrics for Pandora and Sirius XM, we conclude that subscription business model is more sustainable than free streaming model. This is why we believe that Sirius XM will always be a step ahead of its free music streaming counterparts.

Pandora generates just $8 in revenue per user from ads and subscription fee, while Sirius XM’s revenue per subscriber stands high at $130. Although Pandora offers an add-free subscription at $4.99/month, the rate of conversion from free user to paying subscriber is low at 5%. [3] Despite having 75 million active listeners, which is almost three times the subscriber base of Sirius XM, Pandora’s revenues are less than one-sixth of Sirius XM’s revenues. [4] Moreover, due to high content acquisition costs, Pandora hasn’t been profitable. In fact, its profitability can take a serious hit going forward, given that SoundExchange has proposed a significant rise in royalty rates, in 2016 and onwards. Hence, there exists a possibility that free music business model of Pandora might be sustainable.

Used Car Space Provides a Lot of Room for Sirius XM’s Growth

Sirius XM’s subscriber base has grown steadily from 18.8 million in 2009 to 25.6 million in 2013, driven by a rise in vehicle sales and the company’s increased penetration among new vehicle sales. [5] However, moderating new car sales and stagnating penetration rate in the new car market has become a concern for Sirius XM more recently. Nonetheless, the company still has the used car market to tap, which has enough potential to sustain Sirius XM’s subscriber growth momentum. The satellite radio provider estimates that there are 60 million satellite enabled vehicles in the U.S. and its penetration in the used car space is low at 30%. [6] [7] We believe that Sirius XM should be able to induce some owners to activate idle satellite radio sets in used cars since it is the only satellite radio provider in the country.

The company has been targeting used car buyers with its two-week free subscription and low introductory prices. A few years back, it introduced its “direct-to-dealer pre-owned program” authorizing dealers to offer Sirius XM subscription to used car buyers. Back in 2010, only 100 dealers were included in this program, but it increased rapidly to 14,000 dealers at the end of Q3 2014. [8] In August last year, the company launched its Service Lane program, in which it offers two-month free subscription to car owners who brought their cars for servicing at particular stations. [9] Earlier this year, Sirius XM announced that dealers who use Reynolds ERA DMS via Reynolds Certified Interface Program will be able to participate in pre-owned and Service Lane programs. [10]

With its aggressive foray in the used car space, Sirius XM should  be able to sustain its subscriber growth amid rising competition from free music streaming services.

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http://investor.siriusxm.com/releasedetail.cfm?ReleaseID=817666
Notes:
  1. Pandora Partners With Pioneer On Internet Radio For Cars, Gigaom, Jan 6 2010 []
  2. 5 million new Pandora users have signed up in the car, Venture Beat, Jul 10 2014 []
  3. Pandora One Will Cost $4.99 A Month, Huffington Post, Mar 18 2014 []
  4. Companies’ SEC filings []
  5. Sirius XM’s SEC filings []
  6. Sirius XM (SIRI) at the Bank of America Merrill Lynch Global Telecom and Media Conference transcript, Jun 3 2014 []
  7. Used car market for Sirius XM Getting Meaningful, Sirius Buzz, May 18 2010 []
  8. Sirius XM Annual Stockholder Meeting, May 19 2014 []
  9. Sirius XM Launches Service Lane Program, Sirius XM, Aug 21 2013 []
  10. Sirius XM Auto Dealers Programs Receive Reynolds Certification, Sirius XM, Jun 12 2014 []