Sirius XM Should Buy Pandora Media

Sirius XM (NASDAQ: SIRI  )  has been growing its subscriber base and subscription revenues, and has started to look for newer avenues for revenue growth, as evidenced by its acquisition of the connected vehicles unit of Agero.

The company has a fantastic position with more than 25.8 million subscribers, but its Internet offerings are not all that popular due to its car-centric service. However, Sirius XM might change that by acquiring Internet radio company Pandora Media  (NYSE: P  ) . Consumers are increasingly utilizing music streaming services, compared to buying or downloading music, and, as a result, ad-supported business models like Pandora are thriving.

Pandora is growing 
Pandora continues to grow its subscribers and revenues, but its net income remains in the red and has been a little volatile in the past. The leading Internet streaming service is doing surprisingly well, in spite of newer competition from Apple (NASDAQ: AAPL  )  which has more 20 million listeners, still well below Pandora's 77 million listeners as of May 2014. Pandora controls 31% of the U.S. music streaming market, according to Edison Research.

In addition, Pandora has roughly 3.5 million paying subscribers, and its monthly listening hours increased 28% year over year to 1.73 billion hours in May 2014. Pandora also has a very strong footing on mobile devices, as mobile revenue accounted for 76% of Pandora's total sales in Q1 2014. Pandora was profitable in the holiday quarter, but swung to a loss in the last quarter as the company's out-sized content acquisition costs continue to be a major issue. 

Sirius XM already has great relationships with content providers, and if a large company like Sirius XM can work with Pandora's team to negotiate for lower music royalty payments, the company could turn profitable. It's also worth noting that Pandora has more than 250 million registered users, and integrating Pandora into some car-infotainment systems will enable Sirius XM to grow advertising revenue. In addition, Pandora is devising innovative advertising products like Promoted Stations, which will help marketers drive consumers to customized content as well. 

Pandora also has a growing paid-subscription business as well. In Q1 2013, Pandora's subscription revenues made up 16% of its total revenues, while in the last quarter subscription revenues made up 27% of Pandora's revenues. 

Similar businesses and synergies
Apple hasn't been able to make a serious dent in Pandora's business, and Pandora is doing very well -- at least on a usage basis. But Apple's decision to acquire Beats for $3 billion to ramp up its music streaming offerings might mean it will seek to become more competitive in the space in the future. 

So it makes a lot of sense for Pandora and Sirius XM to be under the same roof, and yet operate as separate brands providing different services to consumers. Sirius XM can substantially increase its advertising revenues by taking market share from ad-supported terrestrial radio by owning Pandora Media, and also have a great offering on the Internet and mobile devices.

And Sirius XM can continue to feature commercial-free music on its platform and have a wide array of exclusive content in more than 140 channels to keep its 25.8 million subscribers happy. And Pandora's growing subscription revenue plays right into Sirius XM's core competency. Sirius XM's original content, produced by its own studios, can also be made available on Pandora's platform -- in the process generating incremental revenue for Pandora from non-music sources. 

Sirius has the financial muscle
The satellite radio company has the adequate financial resources to buy a company the size of Pandora. Sirius XM's stable cash flow and EBITDA growth characteristics will enable it to borrow a lot more cash and apply more leverage in its capital structure. At the end of last quarter, Sirius XM had total debt of $2.9 billion, but raised another $1.5 billion in the current quarter to maintain its leveraged business model in the low interest rate environment. Sirius can raise more cash and stock for a possible merger with Pandora. 

Sirius XM could also be opportunistic in acquiring Pandora, as the leading Internet radio service saw its stock price experience a dramatic pullback during the broader technology sector sell-off. 

Combining two franchises dominant in their own respective categories would be a great move. And with Pandora's valuation being a lot more reasonable than it has been in the past, an offer from Sirius XM would be opportunistic and strategic at the same time. 

The bottom line
Sirius is the dominant company in the satellite-enabled car entertainment space, and has growing fundamentals. The company could bolster its Internet offerings by acquiring Pandora, while also eliminating a competitor as Pandora is increasingly being added to dashboards in numerous cars. To put it simply, Sirius XM buying Pandora would be a great move.

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Read/Post Comments (14) | Recommend This Article (5)

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  • Report this Comment On June 13, 2014, at 10:01 AM, jojopuppyfish wrote:

    I don't agree at all.

    I'd like to see Sirius market their internet radio better.

  • Report this Comment On June 13, 2014, at 10:04 AM, sirifair6 wrote:

    IF,

    I am not sure this is a good idea. Name me what p has and siri doesn't. Pandora has been and will remanin a money loser after as many years in business as siri. This is not an accretive step for siri and I would stay away from such moves.

  • Report this Comment On June 13, 2014, at 12:18 PM, Guggerpaul wrote:

    Let me guess, the author invested in Pandora and now wants Siriusxm to bail him out? Siri already has streaming I get it on my phone. Just because Siri can afford to buy a money loosing business doesn't mean they should.

  • Report this Comment On June 13, 2014, at 1:49 PM, Varchild2008 wrote:

    SIRIUS XM should buy SIRIUS XM Canada.

  • Report this Comment On June 13, 2014, at 2:50 PM, sirifair6 wrote:

    Gugger,

    I do not know if the author is or is not invested in p. What I do know is that the author has been quite scrupulous in his assessments of siri in multiple articles.

    I repeat p adds ZERO to sirius xm and will be a burden on its neck. We all would like siri to march with mile large steps vs. yards. However, there is only one true way of creating a robust business. It is by building by building its rock solid foundation, and this takes time. In five years or so we will all be marveling siri's success and wondering why we have not invested in the company in 2014.

  • Report this Comment On June 13, 2014, at 2:55 PM, sirifair6 wrote:

    Sirius xm should not buy sirius xm Canada for a simple reason. It already owns a 38% stake in the company. Plus Canada laws restrict a majority stake in Canada's media companies.

    FYI, sirius xm gets a lot of cash from sirius xm Canada being its part owner and providing siri's satellite service. This month sirius xm will get a dividend commensurate with its 38% stake by sirius xm Canada. The better sirius xm Canada is doing the more money sirius xm will be making off it.

  • Report this Comment On June 13, 2014, at 6:17 PM, PhilAngeleno wrote:

    I think I am dumber for having read this... mostly due to the commentary. Pandora has 3 times the audience... and it's everywhere (auto, mobile, desktop, tablet, etc.). RE: siri... who wants to PAY to hear Commercials?!?!?!??? Sirius = LAME. If i want to hear too many commercials i can listen to the AM/FM radio. Pandora's in-car advancements (along with iHeart, spotify and Apple) will KILL SiriusXM in the long run. There was not enough audience for Sirius and XM to both succeed... leads me to believe Satellite is a thing of the past. streaming and the connected car are the future.

  • Report this Comment On June 13, 2014, at 8:37 PM, Jheebo wrote:

    A silly little marketing article by the fine writers at MF -there are so many things wrong with this idea, it's stunning editors let it be published.

    Let's start with the obvious, if Malone wanted Pandora he could get it - Sirius has no play here, just Liberty.

    Why would Malone want Pandora, for its exceptional cash flow and profit margins?

    Rates have been decided by regulators. They are not "negotiable," certainly not by Sirius and Pandora making a pact. They would have to file an appeal to get anything changed, and why wouldn't SIRI do that when Pandora needs to do that all by their lonesome.

    Just an article for clicks. Be sure to read the last paragraph, readers.

  • Report this Comment On June 13, 2014, at 8:57 PM, BillFromNY wrote:

    Sure, Phil, Pandora is doing great except for that little matter of having more money coming in than going out. It is life and death paying its royalty fees when they are due.

    And, best of all, they have a brand new competitor who has $150 billion in spare cash in the piggy bank.

    Apple's new CarPlay interface for select Apps on a user's iPhone will support Spotify. You can see its icon on the touch screen. Pandora? Don't know if CarPlay will support Pandora, but in the half a dozen articles I've read there's been no Pandora icon and no mention of future support, unlike Spotify.

  • Report this Comment On June 13, 2014, at 8:59 PM, BillFromNY wrote:
  • Report this Comment On June 13, 2014, at 10:14 PM, BillFromNY wrote:

    This just in. My initial research was not that hot. It is confirmed that CarPlay will not support Pandora, although it will support Spotify and several other Internet music streaming competitors.

    http://www.macrumors.com/2014/03/03/carplay-no-pandora-suppo...

  • Report this Comment On June 14, 2014, at 6:48 AM, zukerman wrote:

    So many writers seem puzzled by Sirius' unwillingness to approach Pandora. I'd imagined this author had figured out why, apparently that isn't the case. Why would Sirius bother to increase it's debt to the tune of 5b to buy something that it could just create itself? Many refer to Pandora's success garnering listeners as a sign of strength, but those that truly understand Sirius realize that there is little value here. Cocktail napkin math tells me that billions have been spent chasing what many are hoping will be the next great thing, to no avail. Mobile is just that, mobile. It hasn't been proven that music streaming can be supported ad only by anyone to date. I get a chuckle every time I read the latest foray to beef up existing services spending many more billions with no prayer to achieve a return in the foreseeable future. Was Apple's launch to attempt to fell Pandora, or was it merely to survive in an already crowded space? Does anyone believe that selling headphones will propel their stock to 1k? Wearable items are available anywhere and Apple certainly wont dominate beyond the crowd that needs them to impress. Sirius' only true competition is cheap and I can get that in any car produced today without an app or without fiddling with all the set up required. Anyone that attempts to swallow this bitter pill will be the laughing stock in the investment world and it wont be Sirius. Pandora trades in the mid twenties for good reason, I wish luck to anyone that thinks this price is a bargain.

  • Report this Comment On June 14, 2014, at 9:49 AM, sirifair6 wrote:

    Let us never confuse advanced technology and business. Calling satellite technology outdated is not only dumb but also a sign of illiteracy and ignorance. The future is with the satellites as life becomes more and more globalized.

    Sirius needs Pandora as much as it needs terrestrial radio. Sirus XM is about the best radio ever, convenience and ubiquity.

    Pandora with its paper customers and billions of money losing music hours adds zero to Sirius XM as a business. On the contrary, it subtracts from siri and will turn away millions of siri's existing customers.

    Sirius XM has never been for everybody and will never be because there are free alternatives not matter how much inferior they are. The fact of life is that many people either do not want to pay for various reasons or cannot afford to pay for a discretionary service no matter how inexpensive and valuable it can be.

    As the economy keeps improving and as education keeps improving along with discretionary spending budget there will be more and more people selecting siri vs. free. When bottled water was introduced first reaction of folks was, "Am I crazy to pay for something that I can get for free?" Now, bottled water is a standard for hundreds of millions. It took cable industry a few decades to become a household feature. I believe that siri's content along with the simplicity of its use and convenience will make it eventually a household thing along with terrestrial radio. It just takes time. The great news is that being so cash rich the company can afford another decade before it is a household brand. The question is, however, “Can the impatient investors afford to wait that long?”

  • Report this Comment On June 14, 2014, at 9:49 AM, sirifair6 wrote:

    Let us never confuse advanced technology and business. Calling satellite technology outdated is not only dumb but also a sign of illiteracy and ignorance. The future is with the satellites as life becomes more and more globalized.

    Sirius needs Pandora as much as it needs terrestrial radio. Sirus XM is about the best radio ever, convenience and ubiquity.

    Pandora with its paper customers and billions of money losing music hours adds zero to Sirius XM as a business. On the contrary, it subtracts from siri and will turn away millions of siri's existing customers.

    Sirius XM has never been for everybody and will never be because there are free alternatives not matter how much inferior they are. The fact of life is that many people either do not want to pay for various reasons or cannot afford to pay for a discretionary service no matter how inexpensive and valuable it can be.

    As the economy keeps improving and as education keeps improving along with discretionary spending budget there will be more and more people selecting siri vs. free. When bottled water was introduced first reaction of folks was, "Am I crazy to pay for something that I can get for free?" Now, bottled water is a standard for hundreds of millions. It took cable industry a few decades to become a household feature. I believe that siri's content along with the simplicity of its use and convenience will make it eventually a household thing along with terrestrial radio. It just takes time. The great news is that being so cash rich the company can afford another decade before it is a household brand. The question is, however, “Can the impatient investors afford to wait?”

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