Here's How Sirius XM Gets Rich

Radio needs reinventing. Google (Nasdaq: GOOG  ) and Sirius XM Radio (Nasdaq: SIRI  ) should partner to make it happen.

This isn't a rant about content or connectivity. Neither Howard Stern's contract nor the proliferation of broadband wireless networks concerns me. (Not anymore, at least.) What does? Revenue. The revenue model for radio needs an overhaul, and I'm including satellite radio in the mix when I say that.

Tuning in for a tuneup
As an investor, I fear radio's all-or-nothing business model. Take Sirius XM, which mostly eschews advertising. Subscriptions accounted for more than 87% of Sirius XM's first-quarter revenue, according to its Securities and Exchange Commission filings.

By contrast, terrestrial and Internet options are built almost entirely on advertising. It works some of the time. Westwood One (Nasdaq: WWON  ) may be struggling to turn a profit, but Web sensation Pandora booked a reported $50 million in 2009 revenue and has a partnership with Ford (NYSE: F  ) to appear in vehicles equipped with Microsoft's (Nasdaq: MSFT  ) Sync smart vehicle service.

We don't have enough data to say whether Sync is a runaway success, but we know that Microsoft and Ford are taking steps to make it as widely compatible as possible. Also consider AppLink, software that promises to allow drivers to control Android and BlackBerry smartphones using voice commands.

Sync is a significant step forward in making devices, radio, and software work together inside a vehicle cockpit. But it doesn't solve radio's revenue problem. Heck, it doesn't even address it. For Google and Sirius XM, that's a screaming opportunity -- but only if they're willing to create Google Radio.

Google Radio? Really?
Really. A confluence of events has influenced my thinking about this:

  1. The emergence of always-on networks. Nielsen Internet Research reports that consumers spent 23% of their time online using social networks in June, up from 16% last year. The appeal of these networks is that they're always on, and there's always someone to talk to. Consider that the members of this group are also more likely to use smartphones, and you've got a rising class of users who'll log on anytime, anywhere, including in their cars.
  2. Too many devices. Look around you. Do you own an MP3 player? How about a smartphone? Apple (Nasdaq: AAPL  ) has sold more than 200 million iPods since the first model was introduced, and with the latest quarter's figures, the Mac maker has likely passed 60 million iPhones sold. And that's just one vendor.
  3. Regulatory crackdowns on texting while driving. Several states have begun crackdowns on texting while driving, and for good reason. There's no way to be alert at the wheel while texting your pal. Ford has taken steps to limit texting while driving via Sync. If Google and Sirius XM want to introduce a Sync alternative, they'll need to build similar features into the platform while also preserving some aspects of connectivity via a voice-activated system.
  4. Google TV. Radio has the same problem as TV when it comes to advertising. Why not attack the problem similarly? Google Radio could index what's playing on satellite, on terrestrial stations, and on the Web and match ads to our listening patterns, as Google TV promises to do with the tube.

What it might look like
Creating Google Radio wouldn't be easy. Sirius XM would have to commit to making a broader type of receiver, and that might mean outsourcing to an audio specialist such as Harman International (NYSE: HAR  ) .

Google would add smarts via its Android operating system. Everything would be voice-activated and built for key services such as Google Voice and Google Maps. We know this is possible; the Big G has been providing voice-enabled turn-by-turn directions via Android phones for months now.

Where this idea gets really disruptive is with advertising. Google has the cash and the smarts to spec and fund a hardware design entirely on its own, pass that to manufacturers, and subsidize purchases.

Yep, you read that right. Google could subsidize the market. But instead of giving car buyers two years of Sirius XM free, as the satrad superstar does today, Google Radio could be free forever, so long as drivers agreed to an ad-subsidized plan. They'd trade privacy for basic satellite radio, with Google managing placements and sharing the revenue with Sirius XM. Premium channels would still require a subscription, but less than what today's subscribers pay -- just enough to create an incentive to switch.

Could the model work? I think so, but I've already had my say. Now it's your turn to weigh in. Should Sirius XM and Google team up to create a better radio platform? Let the debate begin in the comments box below.

Apple and Ford are Motley Fool Stock Advisor selections. Microsoft is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Motley Fool Options has recommended creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of Google and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy can't listen to you right now; it has to focus on the road.


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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 August 03, 2010, at 11:00 AM, ClutchNut wrote:

    Good idea, not sure if Google would go for it due to the cost. This would be the type of thing that would make Malone convert that 40% ownership into shares and kill value for current shareholders. Apple would be another good partner but they seem to want to focus on equipment and not own content. I think SIRI will be taken over by Liberty Media and Mel will retire (he is almost 67) in a year or so when restrictions expire and they are free to do so and grab those NOL's.

  • Report this Comment On August 03, 2010, at 11:16 AM, king4life wrote:

    Why would SIRI need Google. They can team with Liberty to deliver Sat TV. Why do you think Liberty out bid the Dish founder? DTV and Dish don't have a mobile solution.

  • Report this Comment On August 03, 2010, at 12:51 PM, RussBinder wrote:

    SIRI doesn't get it. America is all about choice. Give the subscribers the choice of with or without ads, without or with a subscription fee, respectively. As one thought, every 10th song would be an ad for the free-subscription listeners, and for those that hate commercials more than they like a few bucks a month, and choose to pay for them to be banished, they get a song instead.

  • Report this Comment On August 03, 2010, at 1:58 PM, werghk wrote:

    I've been saying this all along.Google,and Apple have BIG money,Liberty don't.Plus, Google, and Apple either one could get into the TV market through Siri.It could be a No Brainer,Plus Google is connected with the White House,and the FCC wouldn't become a threat down the road.

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