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Pandora May Be Selling, But Sirius XM Holdings Won't Be Buying

By John-Erik Koslosky - May 27, 2016 at 6:40AM

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Sirius XM is believed to be one of Pandora's suitors, though it's unlikely that a deal between the two will be consummated.


Things haven't been going well for Pandora Media (P), with shares down more than 50% from their September 2015 high and the recent ouster of the company's CEO. Now come calls to put the streaming service on the auction block.

Pandora may be selling, and it may have potential suitors lining up if the price is right. But there's one company that we shouldn't see getting in on the action: Sirius XM Holdings (SIRI 1.30%).

Those annoying ads

Pandora is an ad-driven enterprise -- some 74% of first-quarter revenue came from ads. That's a business model Sirius has avoided from the start, preferring to keep ads to a minimum and bring in the bulk of its revenue through subscription fees.

Advertising contributed 3% of Sirius XM's $1 billion in revenue last quarter. Subscription fees made up 84%. The company has said it will look to increase ad revenue where it can, but it likes the ad-free format for music.

Are streamers really the competition?

Sirius looks like a better candidate as a suitor for Pandora if you see the satellite service in competition with the streamers. However, the former's executives believe that too much has been made of this issue.

Sirius knows its customers use streaming services, but it doesn't believe that streaming services like Pandora have had much of an effect on its business. So, why would it pay billions to get a better position in the streaming space?

CEO Jim Meyer addressed the issue bluntly when speaking with analysts in early 2015:

I get a little bit annoyed time and time again when people compare streaming to satellite .... The question has been and will continue to be: Will people pay for radio? And I believe we've proved that very close to 28 million people today will pay for radio, and that's really our task going forward -- forget about how it's delivered.

Growth is slowing

There are reasons Pandora may be attractive. It boasts 100 million unique listeners a month. Quarterly revenue of $297 million was up 29% over the year-ago period.

But the company is also still losing money. The quarterly loss from January through March came in at $57.4 million, almost three times last year's first-quarter red ink.

What's more, the overall time spent listening to the service grew at just 4%, while the total number of active listeners barely crept upwards, from 79.2 million a year ago to 79.4 million today.

That doesn't paint a picture of a vibrant growth story that Sirius would find too good to pass up, especially since Sirius continues growing paid subscribers by some 8% annually.

Other places to put its money

With Sirius XM's subscription-based business model generating $1.3 billion in free cash flow last year, and most of its major capital expenses to set up its satellite system in the rearview mirror, Sirius has a business model that can continue to spin off a lot of cash.


Executives say they will continue to look for ways to spend that strategically, and there are a number of ways it can do so, from scooping up niche players in connected-car technology to boost its offerings there to developing the video platform it has promised with the resigning of Howard Stern.

But investors shouldn't look for Sirius to use that cash to acquire Pandora or any other streaming service.

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