Did Amazon Just Kill Sirius and Pandora?

Source: Amazon

On June 12, Amazon.com (NASDAQ: AMZN  ) announced a new feature to its Amazon Prime membership called Prime Music. Although some investors might find the development of the company's flagship product exciting, the market reacted by sending the business's shares down nearly 3% to $325.91. Is this a sign that Amazon's add-ons to Prime are diluting shareholder value, or will the company's service be so successful that it could threaten the existence of companies like Sirius XM Holdings (NASDAQ: SIRI  ) and Pandora Media (NYSE: P  ) ?

Amazon's new service rocks... literally!
By paying the $99 yearly fee, individuals can become members of Amazon Prime. Included in the service is free two-day shipping on over 20 million items, access to over 40,000 movies and television shows via the company's Prime Instant Video service, and the ability to "borrow" more than half a million books through the company's Kindle library.

Source: Amazon

With over 20 million subscribers at last count, Amazon Prime can be expected to generate at least $2 billion in sales for Amazon this year. As a percentage of sales, this part of the business's operations is surprisingly small at 2% of forecasted revenue for the current fiscal year. Margins have yet to be disclosed on the service because it's too small relative to revenue for Amazon to have to disclose, but more likely than not, the company is using the service as more of a marketing tool designed to bring buyers to its website than anything. 

Now, with the addition of Prime Music, Amazon is bringing more than 1 million songs from top artists to its platform. On top of listening to the music you want at no extra charge, Prime Music allows users to create their own library and playlists, listen to the company's pre-set playlists, and receive song recommendations... all with no advertisements. To make things even sweeter, Amazon has made it possible for listeners to play their music on most any device and to download the music for offline listening to avoid data charges.

Will Amazon put Sirius and Pandora out to pasture?
One potential consequence of Prime Music is that it could mean trouble for Sirius and Pandora. Over the past five years, these streaming services have seen their sales soar and, in the case of Sirius, profits rise. Can these businesses stand up to a player whose market power surpasses theirs combined?

SIRI Revenue (Annual) Chart

SIRI Revenue (Annual) data by YCharts

Between 2009 and 2013, Pandora saw its revenue soar 674% from $55.2 million to $427.1 million. At the same time, Sirius's top line grew a more modest, but still impressive, 54% from $2.5 billion to $3.8 billion. During this timeframe, Pandora reported a net loss that widened from $16.8 million to $38.1 million as higher sales were offset by the soaring cost of content and growth initiatives. Sirius, however, saw some nice results, with its net loss of $352 million in 2009 turning into a net gain of $377.2 million.

Although Amazon has not provided official subscriber data related to its Prime memberships, the company's statement that its user count has surpassed the 20 million mark means that it's on par with Sirius' 25.6 million base (21.1 million or 82% of whom are paid users.) What's more is the fact that Amazon's service, which includes all of its other perks, is far cheaper than the $119.88 to $199 per year charged by Sirius. Possibly the only positive note for Sirius is that the company has its radios installed in over 50 million vehicles, which may serve as a deterrent from switching to Amazon's platform even in spite of cost-savings.

  Subscribers (millions) Annual Cost
Sirius XM 25.6 (21.1 paid) $119.88-$199.00
Pandora 76.2 (2.1 paid (est)) $36.00
Amazon 20+ $99.00

Source: Sirius, Pandora, and Amazon

Because of its revenue composition and the fact that the business has yet to turn a profit, Pandora might be even more susceptible to Amazon's entry into the music space. Currently, the streaming service charges just $36 per year for its Pandora One subscription but at just 18% of sales (versus the 82% of revenue it generates from advertisements), even it could be negatively affected by Prime Music's decision to avoid advertisements.

Foolish takeaway
Right now, Amazon is trying to be everything to everybody. While this is a noble ambition, shareholders appear to see the company's attempts as a distraction from value creation. In the long run, management may prove itself right but it's also possible that shareholders will end up with less money in their pockets if the company cannot use services like Prime Music to generate attractive returns. In the event that investors are wrong about Amazon's move, it could mean trouble for other streaming services like Sirius and Pandora because of the company's market presence and the cost and convenience factors at play.

Your cable company is scared, but you can get rich

Right now, a war is raging for a spot in YOUR living room and there are a number of companies set to benefit!  Is it possible that Amazon, Sirius, and Pandora are all set to gain from the momentous shift or are there even better ways to play the revolution?

You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 


Read/Post Comments (5) | Recommend This Article (6)

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 June 21, 2014, at 5:20 PM, sirifair6 wrote:

    Daniel,

    Amazon did not and will not kill anyone. Amazon's move into the jukebox business will be a money loser like it is with pretty much all "free" streamers. The only real player here is sirius xm that relies on subscription business exclusively.

    I am amazed at how psychotic many are once a new player emerges on the streaming market as if the domsday has arrived. Unlike sirius xm with its own formidable and 100% independable network of satellite and ground infrastructure, a lot proprietary and/or exclusive content supplemented by its streaming service, free streamers have overcrowded the market to the extent that they are already stifling one another.

    The only true and profitable paid radio business with clear monopolistic features at the moment is sirius xm with an insurmountable moat even for such behemoths like apple and google. All others have failed profoundly to realize that real paid radio, in particular in the auto were siri will be dominating undoubtedly, is the only true business of the future. Look at Pandora that has been in business about the same time as siri and is still a money loser in spite of its umpteenth subscriber.

    Sirius xm is hugely fcf rich with margins trending toward 40%+ and will continue being head and shoulders above everybody else for as long as one can see. It is absolutely amazing that this was allowed to happen. It is like letting a top notch marathon runner start the race one hour before the others. Isn’t it obvious who will win with such handicap?!

    It is sad that you and others indulge in such pathetic baseless and cheap fear mongering tactics on such no news. Siri's caravan is so much ahead of everyone else that no matter how loud dogs are going to bark the caravan will keep marching to its destination of unbelievable success. Mark my word!!!

  • Report this Comment On June 21, 2014, at 7:40 PM, LPB1964 wrote:

    STOP, PLEASE STOP... Your Foolish babble is making me sick. SIRI will grow for the next 10 years. $5 per share in the next 12 months.

    Do you think people just listen to music? Or maybe just maybe they like to listen to CNN Live on there way to work or Howard or well the list of LIVE stations is just amazing!

  • Report this Comment On June 23, 2014, at 10:13 AM, DavidinNV wrote:

    This is one of the few articles I've ever seen that describes Sirius as a "streaming radio" service. The reason is that such a description is dead wrong. While SIRI has a streaming component, it is a satellite radio service, with unrivaled content, and there is no other company in its space.

    End of story.

  • Report this Comment On June 23, 2014, at 2:49 PM, PhilAngeleno wrote:

    AGREED, DavidinNV... that was the first thing that came to my mind. Sirius is in no way, shape or form a "streaming radio" service. And, Amazon will not kill either company... in fact it won't even make a dent. Amazon does not have enough "Prime" subscribers to come close to affecting Pandora's 76 million active monthly listeners who access the service for free.

  • Report this Comment On June 23, 2014, at 2:50 PM, PhilAngeleno wrote:

    http://www.fool.com/investing/general/2014/06/21/apple-shoul...

    something else to note... from your own site. why would apple even consider this if Pandora was going to be "killed" by Amazon. If anything, Amazon's subscription service just killed Beats (only 200,000 subscribers... sad)

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