Listening to the radio is a common form of entertainment. Like television, most radio stations thrive on deals with advertisers who are looking to reach listeners.
Sirius XM (SIRI) is a dominant force in the world of radio. Unlike legacy terrestrial radio, Sirius XM offers content through its unique satellite product. This is a major differentiator because people have the convenient option to tune in to a variety of entertainment channels on demand.
While the value proposition from Sirius is clear, investors may want to dig a bit deeper into the company before buying shares. A thorough understanding of the company's business model, challenges, and strategy should help build a more informed thesis around investing in Sirius. Let's dig in and assess whether Sirius represents a buying opportunity right now.
1. The business model is different from traditional radio
Although advertising is an important component of Sirius's business, it only accounts for about 19% of the company's total revenue. Given that Sirius operates as a satellite radio provider, you may be wondering where the bulk of the company's sales come from.
What makes Sirius much different from terrestrial radio channels is that it requires a subscription. In other words, if you want access to content on the Sirius platform (which also includes music streaming service Pandora), then you need to sign up for a subscription. Moreover, the company is currently the only satellite-radio provider. This gives Sirius a lot of pricing power when signing up customers.
Sirius ended 2023 with 34 million total subscribers, and nearly 80% of revenue stems from this base. With such a high level of predictable, recurring revenue, investors may be encouraged by the prospects of Sirius. However, there are some challenges the company is facing, and these are worth a close look.
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2. Subscriber churn is a problem
While 34 million total subscribers is impressive, this is actually a net decrease of about 445,000 compared to 2022. This affected Sirius' subscription revenue last year, and it also affected the company's total revenue base -- both of which declined compared to 2022.
While churn might seem like a glaring issue, it actually makes some sense. The competitive landscape related to streaming content is intense. For example, Spotify Technology and Apple have become landing pages for podcast enthusiasts. Furthermore, the shift to more work-from-home environments has affected the number of drivers on the road -- many of whom can't justify the cost of another subscription service relative to how often they drive now.
One of the ways Sirius is looking to combat this dynamic and differentiate itself from the competition is by beefing up its exclusive content.
3. Exclusive content isn't a guaranteed slam dunk
For years, Sirius was arguably best known for its exclusive deal with media personality Howard Stern. However, the company has done a nice job growing beyond talk show radio -- offering listeners popular channels featuring music from iconic musicians such as The Beatles and Tom Petty. Now, it seems like Sirius has its eyes set on a new growth driver: podcasting.
In 2022, Sirius spent a reported $150 million to acquire the platform Team Coco -- a media business led by comedian and late-night television personality Conan O'Brien. And in January, Sirius spent a reported $100 million to lure the Hollywood creators of popular podcast SmartLess away from Amazon in a multi-year deal.
On the surface, starting to invest heavily in podcasting may seem like a logical next step in Sirius's evolution. However, this playbook isn't exactly unique.
Between 2020 and 2021, Spotify spent an estimated $1 billion acquiring various podcasting platforms and inking deals with a host of celebrities and influencers. The idea behind this was that Spotify would revolutionize the listening experience beyond just music, and become a one-stop shop for audio entertainment.
Although this may have made some sense in theory, the investment in podcasts hasn't been as lucrative as some may have thought. For now, it doesn't appear that advertisers are as keen to spend on Spotify's exclusive podcast channels, which makes recouping investments in content outside of its legacy music service much more challenging.
At the end of the day, there is only so much Sirius and other streaming platforms can do to entice users. Netflix has spent billions over the years creating new, original content outside of its licensing deals. So far, this strategy appears to be paying off, as Netflix is home to a number of highly successful home-grown programs and movies. However, given Spotify's lack of success with owning certain podcasting rights, I am a little perplexed to see Sirius follow the same template -- especially as subscription revenue falters.
In a way, I see the Sirius investments in podcasting as somewhat desperate. It seems like a pretty big gamble to help drive engagement, and I struggle to buy into the bull case here. While I am an avid listener of many of Sirius' music channels, I think I personally like the service more than I do the stock. I'll continue to be a happy customer, but will pass on the investment for my portfolio for now.
