Sirius XM (NASDAQ:SIRI) is the only satellite radio provider in the U.S. with close to 25 million paying subscribers. The firm’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. In January 2010, Pandora joined hands with Pioneer, an electronics manufacturer, to offer Internet radio in cars.  This year, the company is planning to launch its Internet radio in 135 different car models from 26 auto manufactures.  While several investors believe that increased proliferation of free music services is threatening for Sirius XM, there are a few aspects that separate it from other music providers.
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. Hence, they aren’t much of a threat for Sirius XM. Moreover, Sirius XM still has substantial room for growth in form of the used car market, which will 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 $3.44, which is roughly in line with the market price.
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Different Content and Target Market
Sirius XM’s key selling point is that it offer 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 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. Although Pandora provides its users with a subscription option to remove advertisements, its 3.3 million paying subscriber base isn’t threatening for Sirius XM.
Low Sustainability of Free Music Streaming Services
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 $129. Although Pandora offers add free subscription at $4.99/month, the rate of conversion from free user to paying subscriber is low at 5%.  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.  Moreover, due to high content acquisition costs, Pandora wasn’t profitable up until the fourth quarter of 2013. Due to low productivity of free streaming services and high competition in this space, there exists a possibility that free music business might not pay off in the long run.
Sirius XM Still has Significant Room for Growth
Sirius XM’s subscriber base has grown steadily from 18.8 million in 2009 to 25.6 in 2013, driven by a rise in vehicle sales and the company’s increased penetration among new vehicle sales.  However, moderating new car sales and stagnating penetration rate in the new car market has become a concern for Sirius XM lately. 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%.   We believe that Sirius XM shouldn’t have too much trouble in activating 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 12,100 dealers at the end of Q1 2014.  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.  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. 
With its aggressive foray in the used car space, Sirius XM should have no trouble in sustaining its subscriber growth amid rising competition from free music streaming services. The only thing it has to watch out for is Pandora’s partnership with Pioneer for offering Internet radio in cars.Notes:
- Pandora Partners With Pioneer On Internet Radio For Cars, Gigaom, Jan 6 2010 [↩]
- 5 million new Pandora users have signed up in the car, Venture Beat, Jul 10 2014 [↩]
- Pandora One Will Cost $4.99 A Month, Huffington Post, Mar 18 2014 [↩]
- Companies’ SEC filings [↩]
- Sirius XM’s SEC filings [↩]
- Sirius XM (SIRI) at the Bank of America Merrill Lynch Global Telecom and Media Conference transcript, Jun 3 2014 [↩]
- Used car market for Sirius XM Getting Meaningful, Sirius Buzz, May 18 2010 [↩]
- Sirius XM Annual Stockholder Meeting, May 19 2014 [↩]
- Sirius XM Launches Service Lane Program, Sirius XM, Aug 21 2013 [↩]
- Sirius XM Auto Dealers Programs Receive Reynolds Certification, Sirius XM, Jun 12 2014 [↩]