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Could Apple and Google Deliver Sirius XM Holdings’ Knockout Punch?

Source: Sirius XM

Sirius XM Holdings (NASDAQ: SIRI  ) has thrived for more than a decade, both pre and post-merger, due to very limited competition in the satellite radio space. Yet, Apple's (NASDAQ: AAPL  ) relatively new CarPlay service poses a major threat. This, combined with Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) announcement of Android Auto, could cause serious headwinds for Sirius XM, but will it be a knockout punch?

Success with ease
With over 25 million subscribers and over 165 channels, Sirius has become the most comprehensive collection of content in North America for vehicles. Over the years, Sirius has crossed the line of radio to media, as roughly half of its stations are designated to talk, news, sports, traffic, etc.

Sirius has grown to a near-$4 billion a year company by default, as its systems come installed in a majority of top auto manufacturers' models. Moreover, its operating margin of 26.8% has also been achieved with ease, as the company lacks significant competition in its automobile space due to its enormous platform of new automobile buyers, which creates pricing power.

New challenges arise
However, the market is quickly changing for Sirius, as it now faces competition from two of the most innovative and transcendent technology companies of all time: Apple and Google. Apple's CarPlay features its iOS operating system in vehicles, including phone, maps, messages, and of course, music. Its CarPlay experience will launch this year, and is already included in some Ferrari, Mercedes-Benz, Volvo, Honda, and Hyundai models. However, it will soon be installed in BMW, GM, and other top manufacturers as well .

Hence, Apple serves as the first significant competition that Sirius has faced in the automobile industry. Its iTunes Radio, a key element of CarPlay, launched last year and already has 40 million listeners. Therefore, it is growing fast, and unlike Sirius, consumers don't have to subscribe to CarPlay (as long as they have a compatible Apple device or an iTunes account).

Sirius longs will argue that CarPlay won't steal much of its market share due to its presence as a media company. Therefore, it should be noted that application developers can also create services compatible with CarPlay, like Stitcher, Spotify, and At Bat. If that weren't enough, iTunes Radio now has original content deals with the likes of ESPN and 42 radio stations from NPR. In other words, Apple is quickly killing the Sirius advantage.

What's Google doing?
As for Google, its Android Auto service was presented at its I/O conference last week. It works very similarly to CarPlay, utilizing top Google applications with a focus on communication, maps, and search. Google also announced options for developers, implying that Android Auto will have the capability to be personalized based on the consumer's need via Google's application store.

Google doesn't yet have a licensing deal with major record labels, but plans to utilize applications like Spotify, iHeartRadio, and Pandora to meet the listening needs of its users. Lastly, Google announced six automotive partners, including the likes of GM and Kia.

With all things considered, the future of this space comes down to logic: What service will auto manufacturers choose? Sirius is using technology that's over a decade old. Meanwhile, Apple and Google both command the smartphone and tablet space with deeply connected devices, so it's no surprise that Sirius will soon be fighting to have its services pre-installed in new vehicles, which might be a tough sell for the company.

Foolish thoughts
Albeit, neither Android Auto nor CarPlay are going to generate billions of dollars for Google or Apple, but they are important in making each company's operating system more connected, and in keeping consumers upgrading to new products that actually do create revenue and profits.

As for Sirius XM, it could very well lose its pricing power and success-by-default model, thereby forcing the company to lower subscription rates and offer better incentives to auto manufacturers to install its platform on what has become precious dashboard space. At 28.5 times next year's earnings, Sirius XM is not cheap, but rather expensive considering these unknowns, and share prices could have a long way to fall.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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