Sirius XM Radio (SIRI 0.25%) had some kind words to say about Pandora Media (P), the leading streaming platform that Sirius XM's majority stakeholder Liberty Media (FWONA) was reportedly trying to acquire this summer. Sirius XM CFO David Frear kicked off last week's presentation at FBR Media Day by being asked about its place in the radio market.
"We are actually the smallest player in terms of listening audience," he said, referring to satellite radio's subscriber base of 30.6 million accounts. That pales when stacked up against the 200 million regular listeners in this country of terrestrial radio or the roughly 100 million active listeners of streaming offerings.
"Pandora as an ad-based streaming service has certainly done the greatest job in the United States of building a base -- 80 million free listeners."
It can be seen as an underhanded compliment. Pandora reaches a lot more people than Sirius XM, but it's a resource consumed mostly by freeloaders. They trade time, momentum, and continuity for the sake of saving money, putting up with ad blocks in order to enjoy the music platform for free. Pandora's active accounts may be nearly three times the audience that Sirius XM is attracting, but Sirius XM commands 3.7 times the trailing revenue and eight times the enterprise value.
"Free definitely sells," Frear would go on to say. "It's an opportunity to participate in a huge advertising market, but If you run down that path you're trying to dislodge the allocation of ad dollar budgets."
In a nutshell, Sirius XM has succeeded in getting folks to pay up for something that they have enjoyed for free over the decades. It's cornering the market when it comes to premium satellite radio. Why would it duke it out in the cutthroat world of streaming services for advertising scraps when it has already locked up the country's most lucrative listening audience? Well, when you think about it, the reason to snap up Pandora may be right there.
The Wall Street Journal reported that Liberty Media was attempting to buy Pandora this summer. The sources claim that Pandora rebuffed Liberty Media's buyout offer of $15 a share. It was reportedly holding out for something closer to $20. The stock was waffling between $12 and $13 when the story broke, but it was trading in the single digits earlier this year before the buyout buzz started to build.
Pandora's in a tough spot. Its user growth has stalled, but it's doing a great job of getting advertisers to pay more to reach its steady audience. Pandora is the top dog in ad-supported streaming, but that also means that it's the the top dog in serving and presumably selling ads. Wouldn't that be a pretty sweet feather to have on Sirius XM's cap?
Sirius XM relies mostly on subscriptions to drive its model. It does have some ad-backed stations, but advertising revenue accounts for less than 3% of its overall revenue. Advertising is an afterthought at Sirius XM, but it doesn't have to be. Can you imagine what Pandora's advertisers would be willing to pay for people that can actually afford to pay for premium radio? Can you imagine the opportunities for higher ad rates presented by combining Sirius XM's roster of sponsors with Pandora's thicker Rolodex of advertisers?
Pandora's active listener base has stalled, but it's growing its top line faster than Sirius XM these days because of its gains in advertising. We know from the market premium that Sirius XM is commanding that a deal wouldn't be dilutive to its top line. It's a different story on the bottom line given Pandora's profitability challenges, but that's also something that Sirius XM has mastered over the years.
And there's the potential of Sirius XM doing a better job than Pandora of getting Pandora listeners to shell out dough for premium streaming subscribers and the low-lying fruit of bundling Sirius XM's receiver-based service with premium Pandora subscriptions. However, if it's a deal merely to own the leading platform of the niche that bears see as Sirius XM's biggest threat and make major headway in the dislodging process of marketing allocation, it's a deal worth considering at this point.