The Real Threat to Sirius XM?

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In this third part of our four-part series, I ask Sirius Buzz writer Spencer Osborne. Sirius Buzz covers satellite radio news but is not affiliated with Sirius XM. Spencer owns shares of Sirius XM.

Mac Greer: We recently interviewed Washington Post technology columnist Rob Pegoraro, and he shared a story about being able to listen to web radio on a Verizon (NYSE: VZ  ) wireless BlackBerry Storm. He said he was able to listen to web radio as he drove from Washington, D.C., to this cabin in the Shenandoah Valley. He used that story to illustrate what he thought were the problems for satellite radio going forward. To what extent do you think web radio, like Pandora and Slacker, is a serious threat to satellite radio?

Spencer Osborne: I think it is a threat that is going to exist and will continue to exist. Pandora has 58 million subscribers. They have been around less time than satellite radio, and granted, while it is considered a free service -- so it is obviously going to have a lot of followers -- Pandora and Slacker and these services really adopted the cell phone networks, the cell phone medium.

If someone’s only interest is music, then those are very viable options. As Pandora and Slacker begin to expand into other things and comedy and talk, that is a real threat for satellite radio.

In order to thrive in the next three to five years, satellite radio is going to have to look at changing its business model. They are going to have to look at what they do on the Internet to really complement what happens on satellite radio -- almost as if they could make the Internet kind of the proving ground for certain genres and channels on music or talk -- and make it available at a less-expensive price, turning satellite into the premium service. Or they might have to go the other way around, but they can’t sit back and rest on their laurels because there are a lot of players in the marketplace, and consumers are running to those players.

When you can get Pandora for free or for a very nominal fee and satellite radio is costing you $15 a month, you start to say, well, how much is CNBC or Howard Stern really worth to me? And if it’s $15 a month, then that’s great. Satellite radio had better focus on signing Howard Stern then, but if it’s not $15 a month, they are in trouble.

Greer: I want to have you rank some potential competitors. We’ve got web radio, we’ve got terrestrial radio, and we’ve got iTunes. How do you rank those as competitive threats to Sirius XM (Nasdaq: SIRI  ) ?

Osborne: In terrestrial radio, I assume you are including HD?

Greer: Correct.

Osborne: The No. 1 threat for Sirius XM is terrestrial radio. Its penetration is everywhere, in clock radios. It is in every dashboard in every car, no matter what year it was. You can be driving around in a 1960s car, and it has got a radio in it.

So that is the No. 1 threat. It is free, it is available, and it is everywhere. People can turn it on without having to jump through two or three hoops. To me, that is still the No. 1 threat, and it is going to exist forever.

By example, I am from Boston, and the Celtics just did their run to the championship and fell a little bit short, but when I wanted to hear what is going on with that, I wasn’t tuning in to satellite radio. Satellite radio is a national perspective. I was tuning in to my local sports station and hearing Bostonians talk about what Kevin Garnett did or what Paul Pierce did. So even as passionate of a satellite radio fan as I am, I still listen to some terrestrial radio. That is the No. 1 threat, in my opinion.

The second is probably web-based radio because even though it is kind of a jukebox, so to speak, if you go to Slacker and Pandora, you build a station. You are not telling them what songs to put on. It’s getting an understanding of you by your listening habits and feeding you stuff you think you’d like.

I will use Slacker as an example. I like the band Rush. I put in there, “Rush radio,” and when I listen to Slacker, every fourth or fifth song is a Rush song. How great is that? The other four songs are songs that if you like Rush, you will probably like these.

I walk into my house, the channels refresh, and when I go back in my car, I have another 10 or 15 hours’ worth of music that plays in a different order than it did before. I can skip, and I have album art and all that fun stuff. So I think web radio, because of the discovery factor, is No. 2.

Apple’s (Nasdaq: AAPL  ) iTunes is No. 3, and to me, iTunes is where I build my library from. I listen to satellite radio or web radio and tag the song, and then I go home, go into iTunes and buy it so it’s in my library.

I have an iPod Touch, and that’s how I get satellite radio in my car, instead of an OEM receiver. If I am driving around in my car listening to satellite radio, and there’s a song that I am not such a fan of, I will just hit a button and I’m over on iTunes. I look for what I want to hear, play the song, put it on shuffle, whatever it might be.

So iTunes will be there, but it is a different format than the radio business, so I would look at that as third, just because of the discovery feature. You are going to discover music on the other services. You are not going to discover, necessarily, on iTunes.

Greer: And who did I leave out in terms of serious competitors?

Osborne: I think that down the road it is all going to be driven by Google (Nasdaq: GOOG  ) --- in about five years anyway. They seem to be running everything on the planet, so in five years, I think the odds are - what’s better, satellite radio or Google radio? Who knows? At that point, Google may even own satellite [radio].

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Mac Greer doesn’t own shares of any of the companies listed. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Google. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2010, at 4:05 PM, m55555 wrote:

    you can't let sirius up can you?I wonder if you'll be in business in 2 yrs? you are all BAFFONS,AN FOOLISH,IN FACT THAT GOES FOR THAT CROWMDOME PARTNER OF YOURS TOO.

  • Report this Comment On July 19, 2010, at 5:13 PM, werghk wrote:

    I'd said all along that somebody like a Google,or Apple could be potential buyers.They certainly have the money to do it.Then the sky would be the limit,with their cash.They could make it more cheaper,and triple the subs.

  • Report this Comment On July 19, 2010, at 5:46 PM, southernbeachguy wrote:

    Interesting............but as I see it.

    1. Terrestrial Radio is terrible, 25% commercials, and it fades in and out depending on distance from transmitter. There is a make for it.

    2. Sports (your Boston example)- that really is a reason to go with Sirus, just think of the people in the Country that love the Celtics but don't live in Boston, they can get it on Sirus. Just think of the 100 other sport team & 200 College games that you can get on Sirus but maybe not in your city.

    3. I can see Apple be a competitor for music lovers only. My question is why buy 15 songs that you will have to listen to over & over, when for the same $15 you can get access to thousands of songs, talk, sports etc.

    4. We all need money to survive, tell me now Slacker or Pandora being free can make enought to survive? I, my children and 300 of my friends have Pandora, but after the initial time to listen to it, it was to much of a pain to listen again.

    5. Other, evidently Sirus has 19 million people that think their service is worth paying for. As old clunkers are junked, sirus will be on their replacements. The Govt will probably force HD radio in a few years, Sirus is already there. Sirus is not there yet, but they have a business plan that can allow them to someday go Worldwide. If they do, opportunities are endless.

    If you try Sirus for one week, you'll never change. Just my thoughts!!!!

  • Report this Comment On July 19, 2010, at 7:13 PM, dan9812 wrote:

    I dont see Terrestrial Radio being that big of a threat. On the sports issue, i was heading back from New York last year and was trying to pick up my detriot red wings on the radio. New York to michigan is not that far but i could only pick it up here and there in mostly big cities and then the signal would fade. I wanted to kill my self for not having sirius, but now i dont have to worry about losing out on them games anymore, thanks to satellite radio from sirius, LONG SIRI

  • Report this Comment On July 20, 2010, at 9:40 AM, doubting wrote:

    We may talk whatever we want but we cannot ignore the facts. Of course siri needs to do better in every field mentioned. It appears that siri has its hands more or less free having put the issues of survival to rest. The uncontested proof of their focus shifting towards operations and profit is in Q2 subscriber growth. Concerning threats from Pandora and others, these concerns are grossly exaggerated. Pandora's average revenue per user is about $1 per year, which cannot support any reasobale business model. This does not mean that siri should completely ignore them but to use them as a threat to siri business is ridiculous. 2010 is still a consolidation year for siri. 2011 will be a year of major strides and 2012 - a blockbuster year fith profits in $1B range. The more successful is siri, the smaller are survival chances of pandoras. It is so unreasonable to doubt siri success anymore when the company is already producing outstanding results in today's economy. How much more proof does siri need to produce to stop this blatant campaign against it?

  • Report this Comment On July 20, 2010, at 4:09 PM, copterdr3 wrote:

    I think there is one key that some folks are overlooking. Correct me if I am wrong but didnt AT&T just recentley start doing away with its unlimited download (of course they grandfathered in all the current account holders.....for now.....) so either way you look at it your either A. gonna give the cell phone companies your money to listen to Pandora and all the other so called "free music" OR B. pay your money to Sirius. Either way eventually every consumer who wants more than what terrestrial radio can offer are going to shell out the $$ to get it. I personally like Sirius (or i wouldnt own any stock in it) if they play their cards right and utilize the internets potential, then they will squash everybody out there.

  • Report this Comment On July 20, 2010, at 4:14 PM, wolfwuf wrote:

    You and your article are the same old rehash of nonsense...even people that like to comment don't seem to bother any more, all it does is make motley fool look foolish. After watching this board on sirius I'd never take any of their products they sell seriously.

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