Is Pandora a Sirius Threat?

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Internet music site Pandora announced this week that it now has 60 million registered users. Pandora has gotten a lot of traction via Apple's (Nasdaq: AAPL  ) iPhone and other mobile devices. And Pandora has made other inroads via a partnership with Ford (NYSE: F  ) . So what does the future hold for Pandora? Is Pandora a real threat to Sirius XM (Nasdaq: SIRI  ) ? And what is the primary threat to Pandora and Sirius? Ryan Saghir is the managing editor of Orbitcast, a website that covers the latest news on Sirius XM and competing industries.  I recently talked with him about some of those competing industries. Orbitcast is not affiliated with Sirius XM, and Ryan doesn't own shares of Sirius XM.

Mac Greer: What do you see as the greatest competitive threat to Sirius right now?

Ryan Saghir: I would say the largest threat continues to be terrestrial radio, because most of the listening is done in cars, but the most emerging threat is most definitely the Internet radio and mobile audio services. And I would say specifically, Pandora is one to worry about. If iTunes decides to really tap into cloud-based streaming services, they have got a strong competitor on their hands.

Greer: And is there a dark horse out there? When I talked to Spencer Osborne last week, he mentioned that at some point Google (Nasdaq: GOOG  ) may get into this game.

Saghir: I wouldn't put it past Google. Of course, Google is exploring all their options. They have got a lot of smart people there, and we saw a glimmer of this when Google included audio search, when they included results from Lala, they included results from a lot of these streaming services. When you type in a song to their search bar, they have so much opportunity to tap into that space if they wanted to. Just knowing Google, they would always provide it as a free alternative; they wouldn't do it as a monthly subscription. And I think whether it is Google, whether it is any of these sorts of services, Sirius XM is going to be competing with a free service, and so they have to really stay on top of being a premium provider of exclusive content, and that is really what they need to focus, [home] in on that and make that available across all the platforms.

Greer: And let's talk Pandora. They have obviously gotten a lot of traction with the mobile and iPhone markets. They just announced that they now have 60 million registered listeners.  They had an estimated 50 million in revenue last year and an estimated $30 million of that went to paying royalties, so obviously they are paying a hefty chunk of that in royalties. Pandora's founder, Tim Westergren, recently said that in the last year, he has finally cracked the nut on how to effectively monetize a streaming radio service, "our intention is to build a radio business that looks a lot like the traditional radio business with a scalable mechanism for selling national and local advertising, so we can do everything from big-branded national campaigns to local pizza joint specials." So with all that in mind, what is your take on the Pandora business model?

Saghir: Initially, I questioned Pandora because they took a stand that was very much opposing the music industry, and if there is ever an industry that you don't want to oppose, it is the music industry, especially if that is your business.  They [Pandora] seem to have the benefit of consumer momentum. People use the service and they love the service, and so that is really what drives them forward.  They have the mass, and when it comes to an Internet radio provider, they really have the great mass. That is how ultimately they are able to tap into those systems and they are able to tap into those advertising revenues, because they have such a huge listener base, a listener base that doesn't look like it is going to stop growing.  

And now looking at how they continue to grow and continue to branch out into different techniques for advertising, it looks like they may have an interesting business model ahead, but man, they are paying a lot when it comes to royalties. While they have cracked the nut and they are working on being profitable, they still have a long road ahead of them. I think it's still very, very nascent in terms of the overall grand scheme of things, but man, that is something to keep an eye out on. Sirius XM and any terrestrial radio and any other competitors out there should not be sticking their head in the sand when it comes to Pandora. Pandora is a force to be reckoned with, and they are growing.

Greer: What is the greatest threat to Pandora? Is it that royalty piece and the fact that if that ends up getting renegotiated or if that landscape shifts, then it potentially just undoes the whole business?

Saghir: One hundred percent. That is the scariest thing about Pandora is they have an utmost dependency on the music that they play. Without that music, they are nothing. So when you have a service like Slacker, who has worked out individual deals with each of the record labels on an individual basis, not necessarily through fighting them in courts and the way that Pandora has approached it. Slacker taps into a lot more, a deeper library and has already worked out all those legal ramifications where Pandora has that hanging over them. There is a sword hanging over Pandora's head constantly. That is their biggest risk. If they just make the music industry just a little bit pissed off, then they could lose out on an entire revenue model. That is very, very scary.

Greer: In January, Pandora announced a deal with Ford to include Pandora in its voice-activated Sync system. Do you think Pandora can make significant inroads with automakers and really encroach on some of Sirius XM's territory there?

Saghir: Yeah, most definitely. And it is tapping into the audience that is a core; it is a small audience, but it is a loud audience. It is an influential audience. That is the early adopters. Not everybody is going to use Pandora in their car; Ford understands that. Ford is positioning themselves as being a technology leader, as being revolutionary in terms of thinking.  They are tapping into the early adopters showing if you want the most advanced, the top-of-the-line, you want Ford, you want Pandora. They have really positioned themselves as being thought leaders and pioneers, and I think that appeals to early adopters. And let's face it, early adopters spread the word, and they are the influencers when it comes to your mom and your dad.

Greer: And three years from now, do you think Pandora is a stand-alone company, or do they end up getting acquired by someone like Google?

Saghir: I could see them getting acquired, and I could see someone like Google or AOL (NYSE: AOL  ) or any of the ones who really want to own the music space. I can see any of the large terrestrial companies deciding to buy out Pandora as well. Anybody that has got some money and is really willing to invest in it and can convince their investors that it is a good move, I could see Pandora getting bought within three years.

What do you think is the greatest threat to Pandora? What's the greatest threat to Sirius? In a cage match, which company is still standing three years from now? Post your comments below.

Mac Greer doesn't have a position in any of the companies listed. He is a Sirius XM subscriber (via marriage) and an occasional Pandora user. Google is a Motley Fool Rule Breakers recommendation. Apple and Ford Motor are Motley Fool Stock Advisor picks. 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 (16) | Recommend This Article (8)

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 23, 2010, at 10:57 AM, Fredlee009 wrote:

    Terrible take. Pandora is a threat to sirius, like tap water is to coca cola.

  • Report this Comment On July 23, 2010, at 11:08 AM, topsecret09 wrote:

    topsecret10's CAPS Blog .Control your car with your smartphone..... #1) On March 06, 2010 at 11:55 AM, topsecret10 (45.55) wrote:

    For all of you Sirius fans out there. You should pay attention to PANDORA,because It could make satellite radio obsolete.... TS

  • Report this Comment On July 23, 2010, at 11:20 AM, daveshouston wrote:

    Google and Apple are both moving in the direction of streaming music. These are the big boys.

    Pandora and Sirius could both be steam rollered.

  • Report this Comment On July 23, 2010, at 11:25 AM, Fredlee009 wrote:

    Sorry, Google is in the same boat as every other cell phone provider. Reason At&t tried Dreamcast. Not enough broadband, and too expensive to stream music constantly on a cell phone soon.

    No threat.

    Pandora doesnt make any money. Like $1. So they will have to use that $1 to grow and add content. Good luck. Since they wont post their profits, and over 60% of total revenue is removed due to royalty charges, I dont see an effective business model here.

    Internet music streaming period is no threat to Sirius XM.

  • Report this Comment On July 23, 2010, at 11:27 AM, Fredlee009 wrote:

    Sirius XM is all about great content, listenable anywhere without interruption, and services like traffic (on star uses sirius sats), and boating and trucking services. No, truckers and boaters will not rely on cell phone signals to function. Sorry.

    If Google wants to compete with sirius xm they need to sign a ton of content, get installed into cars, and begin sending up 400 million dollars satellites.

  • Report this Comment On July 23, 2010, at 11:40 AM, werghk wrote:

    What about AT&T and Verizon putting limited internet access on their plans? That should be the KILLER of internet radio,plus royalty fees = $0.00

  • Report this Comment On July 23, 2010, at 12:20 PM, Bootluver wrote:

    Is The Motley Fool any threat to becoming the stupidest analyst site on the World Wide Web?

    Afraid so!

  • Report this Comment On July 23, 2010, at 12:33 PM, Fredlee009 wrote:

    yes if at&t is doing it, verizon will be sure to follow.

    Why they are desperate for more spectrum for broadband. Now begging some sat specrum users for access to work with cell phone companies.

    Still, even then, Sirius is on the internet, and the best option on the internet even. LOL

  • Report this Comment On July 23, 2010, at 12:40 PM, JamesRobertDobbs wrote:

    Egads. How many times is MF going to publish these "Internet radio will beat out Sirius" articles? Let's go over it once again:

    1) There are millions of cars out there, many of which have Sirius radios. The current Internet infrastructure can not handle the addition of millions of new nodes, and won't for the foreseeable future. This doesn't even include the issue that these cars will need to receive Internet from transmitters, wherever they are.

    2) At what point will the monthly cost of an in-car Internet service plan approach the low monthly cost of a Sirius subscription?

  • Report this Comment On July 23, 2010, at 1:01 PM, davebcarr wrote:

    Fredlee009 gave the whole answer to the question. ATT & Verizon are going to push the cost of internet radio far beyond SIRI. SIRI is going to be around for along time.

  • Report this Comment On July 23, 2010, at 1:50 PM, Cool700 wrote:

    The bottom line is...Pandora will end up costing more to use even though it is free. The fees will rack up. SIRIUS XM will be cheaper and has more content.

    An in car internet plan for Pandora??? Is this a joke? You need a wiFi connection to listen to Pandora in your car and they are not easy to find.

    A network across America is not gonna happen. I know our government can not afford it and I am sure Pandora can not afford it.

    With SIRIUS XM you can listen to the same channel while traveling across America! You can't and will not be able to with Pandora.

  • Report this Comment On July 23, 2010, at 2:29 PM, Grrrrt wrote:

    These articles about Pandora vs SIRI are non-sense idiocy.

    The reason mnost people move to Sat Radio (Sirius XM) is because of NO ADVERTISING. Can any Internet radio ever compete with NO ADVERTISING? NO!

    Idiots... you'll only get my commercial free sat radio from my cold dead hands! Keep dreaming and keep listening to stupid commercials all day long!!!

  • Report this Comment On July 23, 2010, at 3:02 PM, FoolNHisMoney wrote:

    So what this article is saying is that Pandora's ultimate plan (and only way to survive, less more succeed) is to emulate terrestrial radio?? We all know how well they are doing! And what makes you think the NAB will not fight against local advertisement on internet radio tooth and nail just like they did with satellite radio?

    Get this in you head: the ONLY way internet radio can succeed is with the subscription model . . . and guess who already has that covered?!

  • Report this Comment On July 23, 2010, at 3:32 PM, doubting wrote:

    Comments above overwhelmingly bring to light the stupidity of the arguments of Pandoras vs. siri. Pandoras' train is so burdened that it will never leave the station. All these 50M or 60M subscriber numbers are a smoke screen. How much money do they bring! $1 per year per customer at best. And their music in the car is loaded with adverstisement. How do they differ then from terrestrial radio? What Pandora is actually doing creating as much hype as possiblein its attempt to SHOP AROUND, and you do not have to be a genius to figure this out. This is a standard practice - get bloated via media and other hype and get sold for as much as you can, and after that the deluge. Who cares? Another true isssue on top of music royalties that will become prohibitive for Pandoras is the COST of streaming that will also kill them. So, they will disappear one way or the other. What siri could do in the meantime is to look if these companies have anything to offer in truth and pick up the best pieces. If I were siri, I would not even consider buying Pandoras. I am confident that within the next 12 months all these arguments and so called threats will be put to rest because siri's results will simply stop the flood of these mediocre opinons of mediocre experts.

  • Report this Comment On July 23, 2010, at 4:17 PM, southernbeachguy wrote:

    Pandora is a flash in the Pan! The first thing you learn in Business School is to survive. If you don't make any revenue you can survive. There are too many companies that are vieing for ad dollars. I can't see Google buying them when they can build their own Internet Streaming model a lot cheaper.I see No value in Pandora. I am a registered Pandora sub are are a dozen of my immediate family. None of us ever use it, but 9 of us use our Sirus radio daily.

  • Report this Comment On July 26, 2010, at 9:57 AM, JamesRobertDobbs wrote:

    I have Pandora. It's a great service, when you have a signal. I listen to it at home. When I'm in my car, it's Sirius all the way. I don't have a pricey data plan that allows streaming through an iPhone/Blackberry/etc., and I actually like radio in my car to keep playing when I move from one spot to another (that's why I'm in a car ;-).

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