What Sirius XM Wants From Pandora

Liberty Media (FWONK) (FWONA) approached Pandora (P) with a buyout offer, and multiple signs suggest that Pandora is now open to taking it up on it. It wouldn't be Liberty's first foray into the music business -- the company already owns a majority of Sirius XM Holdings (SIRI 0.98%), and the two companies have the same chairman.

In this clip from Industry Focus: Tech, Dylan Lewis and David Kretzmann talk about a potential deal.

A full transcript follows the video.

This podcast was recorded on Dec. 9, 2016.

Dylan Lewis: Sirius has not been quiet about seeing the difference in how Pandora operates relative to the other streamers, and saying they like it. Actually, at a June investor conference, Sirius XM's chief financial officer, David Frear, said, "Among the streaming companies, Pandora has a better opportunity for a solid business model." I don't know if the idea there is, their content library doesn't need to be nearly as big because it's not on-demand? They're still paying per stream for fees, which can make it tough. I mean, I think royalty payments make up about half of their revenue. So, it's really tough to make the numbers work. By contrast, I think for Sirius, it's 11% or something like that. Huge difference there. But they see something. I don't know if it's valid with what they see, but they seem compelled with the type of business model that they have.

David Kretzmann: It would be interesting to see if they see any sort of, I'm going to use the word synergies, between the content that they have with Sirius, and the content of Pandora, or if they would want Pandora to be a stand-alone offering. I look at it now, and similar to you, it clearly hasn't worked up to this point, financially. Something has to give for the company to actually become cash-positive and profitable on a consistent basis. So, maybe there is some way that they can combine the two and make it work. Another reason that this should be taken seriously is, the board of directors at Sirius is just stacked with media heavyweights. You have John Malone, who's obviously the mogul behind Liberty Media. But you also have former presidents and CEOs -- and current CEOs, in some cases -- of ESPN, DirecTV, Discovery. So, Sirius has, as far as a board of directors go, and if this board of directors is interested, that should be taken seriously. They obviously see something with Pandora. To me, it's still not completely clear what that is. But if they can spell it out and make a compelling case, then I think shareholders would be on board, because it is a substantial financial commitment for Sirius. It'll be interesting to see if we learn anything more.

Lewis: Yeah. You mentioned John Malone. That's where there's some nuance here that gets beyond just what we see in the headlines. This time around, I've seen Greg Maffei and he's billed as "chairman of Sirius" approaching Pandora for an inquisition. Last time around, it was Greg Maffei, "CEO of Liberty." So, it's curious to see how they decide to go about this, because strategically, it might be a little bit different if Liberty is pulling the strings and ultimately winds up making the deal happen. Sirius is majority-owned by Liberty, like we talked about. Liberty could decide to basically pair that streaming service, Pandora, with the concert and ticket business, Live Nation, which they own about one third of, basically. Pandora has seen a ton of success in using its platform to sell concert tickets through Ticketfly, which they acquired a little while back. That's a very small part of their business now, but you see those types of pairings, and an acquisition makes more sense. It's just, how involved in the other Liberty properties might Pandora be, once it's under their umbrella? Or, will it be something that is siloed to Sirius, because they're the acquirer, and that's it. I doubt it. I think they'd probably explore pretty much anything and everything. But that's certainly a cool thing to watch. When you start thinking about it that way, a deal makes a lot more sense.

Kretzmann: Definitely. And it's not surprising to see those nuances here, because John Malone and Liberty, they are the kings of spinoffs, mergers, all sorts of wonky deals to maximize the financial value of any sort of transactions like this. But that is a really interesting point. When you're approaching this acquisition, how can you make Pandora different from other streaming options? And whether it's through Liberty or Sirius, I think there are some ways that you could see that happening. Exactly what route they take, I think that's the question that'll be on shareholders' minds, if the offer is indeed made. But there are a lot of properties under that Liberty umbrella, beyond even Live Nation or Sirius, that could build more of a moat around that Pandora listener experience.