Sirius XM Radio (NASDAQ: SIRI ) hasn't had a problem growing its paying audience over the years. Premium radio is convenient, and it's hard for drivers to live without it after they have experienced it. Nearly half the buyers who check out the service when they buy new cars stick around as paying customers after their free trials end, and only about a quarter of the service's paying subscribers bow out in any given year.
It's against this backdrop that Sirius XM CEO Jim Meyer was a guest on CNBC yesterday. He dismissed Pandora's (NYSE: P ) model in discussing Sirius XM's dozens of ad-free music channels.
"There's no way that Pandora's model could ever work without a lot more advertising," he said. "We think that plays to our strength, because our music stations are going to remain commercial-free forever."
He's right, but it also bears pointing out that Pandora is getting better about monetizing its content. Revenue climbed 50% in Pandora's latest quarter even though it served up just 17% more content. One can also argue that if the number of ads is a problem for listeners, Pandora offers an ad-free service that costs substantially less than Sirius XM's monthly plans.
Asked about what the biggest threat to satellite radio is at the moment, Meyer responded that free radio is Sirius XM's biggest enemy.
"Forget the technology of how people get it," Meyer responded. "The biggest gorilla in the room is still terrestrial radio."
Meyer argues that AM and FM stations collectively generate $15 billion to $16 billion a year in revenue. That pales in comparison to Sirius XM and its current annual run rate of nearly $4 billion. But isn't this another case where Meyer may be underestimating Pandora -- at least in public? Pandora reported its monthly metrics this morning, claiming that it now accounts for 8.44% of the total U.S. radio market in terms of audio content consumed. As its monetization efforts continue to bear more fruit, will we one day see Pandora raking in its share of the total U.S. radio advertising spending? It can happen. There's a lot of waste in terrestrial-radio advertising, and Pandora offers the advantage of targeted marketing.
Sirius XM and Pandora can thrive in this market. They have both become viable alternatives to traditional radio stations in this age of connected vehicles, and if countless AM and FM operators can share such a big pie there's no reason Pandora and Sirius XM can't share the potentially bigger pie of premium and streaming services. This has never been about the gorilla in the room. It's about the potential for the room itself to expand in ways that the industry hasn't even started to imagine.
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