Co-Authored by Brian “Newman” Rayl and Dennis “Cos” Costa
A short time ago my partner Demian Russian wrote an article comparing Sirius XM Radio (SIRI) to a newly announced Slacker integration of ABC News. This sparked a conversation on our message boards and during our weekly Playground Radio show, which compared the pros and cons of each company’s offered services. Of course a discussion of these markets and operating platforms requires consideration of Sirius XM’s competition as a whole. Aside from the plethora of local Internet radio stations that we could talk about, whose programming is generally local and serves a different market, we instead turned our attention to the two audio players that are most frequently compared to Sirius XM as their competition — Slacker and Pandora.
It was decided that we would do a “Bull vs. Bear” type debate, written about the Internet platform and the competition represented by these well known companies. A funny thing happened to us on the way to the debate table – both of us could not come up with a valid disagreement between the two of us. Instead, we determined that the main disagreement between us was the impetus for Sirius XM to commit to such a move in the first place. Should Sirius XM Radio develop a more complete package for the Internet platform themselves, or should they consider an outright purchase of either of these two companies? Integrating either’s feature-packed software into the satellite radio company’s superior content might be the more preferred option, building on already well known and received services which both companies now enjoy.
Brian contended that Sirius XM should do more to compete directly with Slacker and Pandora on the Internet radio platform. Dennis was adamant that Slacker and Pandora should not be considered real competition to Sirius XM. Dennis’ reasoning was that the primary subscriber source and targeted consumer markets for each company being considered are vastly different. Satellite radio’s primary source of subscribers is from new vehicle sales from contracts with virtually all of the automakers, while Slacker and Pandora garner their users through the Internet. Sirius XM’s consumer base is the drive-time consumer, while Slacker and Pandora are more of a home-based listener service. It is quite clear that the comparison is not an apples-to-apples comparison when it comes to these services.
We both agreed that Sirius XM is the superior content service and provides the best and widest variety of access to that content — hands down. We also both agreed that Slacker and Pandora are feature rich with a very nice “jukebox” feel to it, allowing you to customize your very own personal radio stations, while providing users with some music discovery advantages at the same time. You can base your station on a certain group or a certain theme, as well as creating a ”hate songs” list so that they never play again. The personalization of these services is quite nice. Obviously you cannot do the this with Sirius XM, leaving the user only able to pick a genre of music, but not the artist. The ability to de-select unwanted artists and songs, while improving the music experience with lyrics and album artwork, would be even more beneficial to Satellite Radio subscribers – features that Sirius XM has yet to produce on any of its platforms. Understandably, this “hate list” feature would not be available on any live content, but could be worked into some type of “delay and record” or cache-type feature. What Sirius XM does have is superior content which you cannot get from either of these competitors’ services; such as Howard Stern, every game of the NFL, NHL, NBA, MLB, Martha Stewart, Rosie O’Donnell, ESPN, live news with CNBC, CNN — and the list goes on and on when it comes to uniquely branded live content. Slacker and Pandora offer some news programming, but only as replays after the fact — never live.
Pandora, Slacker, and the plethora of other Internet radio services out there lack a proven business model. Internet radio is what I consider a loss-leader. According to definition, a loss leader is something that is used to entice people to a store or service in order to convert them into products that have higher profit margins. An example of a loss leader would be cell phones. The phone itself is either given away for free or sold at a reduced cost, making little profit. The money is in the subscription plan for the company and in the sale of accessories. This is what Internet radio is. For instance, Last.fm is an Internet radio service owned by CBS Corporation (NYSE:CBS), which they use to draw people to their sites for advertising and to draw people into their other services. Slacker and Pandora have only their Internet radio players which are dependent mostly on advertising, though both services do offer a “premium” service with some added features. In the current economic environment, advertising revenue is down and music royalties are up. Pandora announced their first profit in Q4 2009 according to its Chief Technology Officer Tom Conrad, though they are not a public company and do not file earnings reports so the exact numbers are not known. Sirius XM has reported several profitable quarters in a row and is on the cusp of profitability for the full year 2010.
However, there is a reason that all of these Internet radio services are out there: Because they are in DEMAND by consumers wanting feature rich choices for audio entertainment. In fact, on July 20th, Pandora announced that they now have 60 million registered users to their service alone. People want to be able to listen to the radio as much as possible, even if it is not THROUGH a radio. From a software and application point of view, we both agree that Sirius XM needs to do a much better job on the platforms that Slacker and Pandora already exist on. In the future, Sirius XM needs to develop software to exceed the “cool” factor that these companies’ software now enjoy. Competing with free is difficult, but Sirius XM’s content has already proven to be a formidable competitor to Terrestrial Radio in their primary market. Neither Pandora nor Slacker have proven to be anything more than a jazzed up MP3 player with prerecorded content, which requires users to interact with it in order to customize content to their liking.
Sirius XM currently has on-line radio platform’s for their subscribers. Unfortunately, the current platform is outdated and not very user friendly. With people flocking by the millions to these on-line radio platforms, it would seem to us that Sirius XM should have a prominent presence in this space. They could utilize that distribution medium to advertise the paid Premium On-line subscriptions, as well as for upgrading users to actual radio subscriptions for their car, or any number of other devices. Picking up Slacker or Pandora would give them a huge advantage in providing an upgrade to their current internet offering, while removing at least one of these competitors.
By buying out Slacker or Pandora now, in a bad economy and before either become grossly profitable, Sirius XM could get them relatively cheap rather than spending the time, money, and resources necessary to develop an identical and competing service. They could then do away with their own outdated on-line radio players and integrate them into the Slacker or Pandora player. Non-subscribers would only have access to the regular music that they have now, with limits placed on the amount of streaming that they could have. A low subscription fee, say a $1.99, offering limited music content of Sirius XM stations could be developed that would allow a sampling of channels and genres, perhaps on a rotating basis, with some “favorites” choice available to the user. Users would also be able to upgrade to the Sirius XM Premium On-line content, giving them access to everything that Sirius XM has to offer on that platform as well as the Premium features of Slacker and Pandora. Best of all, these services would all be offered through the Pandora or Slacker applications which are already available on nearly every platform available such as the Apple (AAPL) iPhones, the Google (NASDAQ:GOOG) Android platforms, Microsoft’s (NASDAQ:MSFT) XBox, Sony Corporation’s (NYSE:SNE) Playstations, and Netflix, Inc.’s (NASDAQ:NFLX) Roku box, to name a few. According to an article on Gigaom.com, Pandora is available on over 100 different products. In December 2009 alone, 3 million people signed up for Pandora and 2.7 million of those people signed up on a device other than a computer. Those numbers are a powerful example of why Sirius XM needs to be integrated into as many devices as possible, and buying out one of these services would give them a significant advantage. As an example of the power of this type of integration, consider this post from our message board:
“I bought a Sony Blu Ray player this weekend, it had wifi and LAN Internet capability on it so I plugged it in and it came pre loaded with Pandora and Netflix. I decided I should see how the competition stacks up. The Pandora application works great for music, except there was a pause between music as it buffers and loads between songs on my BluRay player. I thought to myself OK, this is actually pretty cool but I doubt they can keep this free forever. I decided to test my iPhone and see if I could drive 30 minutes in the Seattle area, using my 3G service playing Pandora plugged into my cars USB input………. Well Pandora is a nice compliment to my Sat radio, but I use SIRI for the NFL and CNBC and so on. As long as SIRI/XM continues to deliver exclusive content, I dont see Pandora as a big threat. I would continue to use all my options in the car even if I was not invested in the company……. It would be nice to see the SIRI/XM service come pre loaded on hardware like the Sony Blu Ray player does with Pandora….. That Blu Ray player purchase led me to take all these steps, I’m sure thats exactly what they want to happen……”
– golong005, Playground Forum Poster
From a marketing and advertising perspective, Sirius XM would also gain access to the email addresses of every registered user, giving them the ability to then promote the service to every single one of them. These advantages cannot, and quite frankly should not be ignored.
Sirius XM appeals mostly to an older, more sophisticated crowd. Pandora and Slacker are aimed towards the younger, more “hip” crowd. This is one of the best ways in which Sirius XM could drastically expand their reach, and introduce the product to a totally different audience. In the recent second quarter conference call, Sirius XM announced the new Satellite Radio 2.0 development, which would be coming hopefully by the holidays of 2011. Could this be a part of Satellite Radio 2.0? From an outsiders perspective, it certainly makes sense to pursue something like this. Would it make sense from a business perspective? That is up to Sirius XM.
Contact the authors:
Dennis “Cos” Costa – denniscosta@satelliteradioplayground.com
Brian “Newman” Rayl – newman@satelliteradioplayground.com
Disclosure:
Dennis “Cos” Costa – Long SIRI, MSFT, AAPL
Brian “Newman” Rayl – Long SIRI, GOOG
It’s a really interesting question. Internet radio has no barrier to entry so the business model continues to be very suspect. You are competing with an unlimited number of futures radio apps moving from the web to phones.
The way Mel put Sirius internet as an add-on service for satellite subs makes sense. The last thing you want to do is cannabalize your own paid subs by offering them a free service alternative.
As an add-on for current subs I believe Mel has a lot of options with the internet. He can add channels, make it more personalized or even buy an existing internet service and add it to the package for an extra price.
I gotta tell you guys I love what Sirius is doing now with the net already. I just think they need Howard on there too.
One thing that internet radio has proven over the last 16 years – there is no standalone business model that works when there is no barrier to entry. The same thing will happen with smartphone radio apps. There will be millions of stations alternatives just like on pc’s. That’s not a business.
Internet radio as a standalone business is a fluke. Right on the target. Internet radio as an add on feature makes sense. Right on the target. Buying pandora type companies by siri will only make sense if the price is right. Pandoras understand better than anyone else that to make real money you need to create real content and this costs a lot of money, much more than they can make now and in the future. Plus there is cut throat competition among pandoras because, as you put it exactly right, since there is no entry barrier any mom an pop shop may enter this business. Pandoras and slackers are dreaming when someone like siri will buy them. The only true purpose of their existence – to be bought for good money. I doubt very much that Karmazin will offer them anything close to their price range. The guy knows how to count money.
“One thing that internet radio has proven over the last 16 years – there is no standalone business model that works when there is no barrier to entry. The same thing will happen with smartphone radio apps. There will be millions of stations alternatives just like on pc’s. That’s not a business.”
You are exactly correct Muscle. That is not a business and I don’t think a standalone internet service is a viable model in and of itself… utilizing the internet as a loss leader to promote a paid service? That is a completely different ballgame.
Very interesting speculation. However, with Mel’s focus on “never getting caught cash short again” and large long term debt still on the books, don’t see this happening anytime soon. Besides, I feel comfortable that they will continue to have their hands full with the sub growth related to autos. No, better to continue to address this competition internally while continuing to expand their established growth areas… at least, for the near term…
This is going to be one of the more interesting things to watch play out over the next several years. Sirius/XM should be the most dominant player on the internet in time. I invested in several startups in the 90′s. Pretty much all of them had great ideas, but the revenues didn’t show up fast enough for the amount of money invested in the development. The pattern repeated itself over and over. Good idea, put tons of money into development, market hasn’t shown up yet, company gets sold off to the big boys for 20 cents on the dollar for their technology. Mel has sufficient revenues to give him options. He can develop in house something that capitalizes on what the company already has, or he can buy one of these guys and try to integrate it. If you have sufficient resources, sometimes it’s wise to wait and see how the market develops before plunging into it. I’m not saying to wait too long, but the longer you wait, the fresher your product will be when you release it. Muscle’s point about cannibalizing your customer base with cheaper alternatives is a very valid one in my opinion. This ship finally started gaining speed. Let’s not rock the boat and mess with the revenue base just yet. Cash flow is too critical for the company right now.
I don’t think this type of service would ever canabalize the subscriber userbase, I think it would only enhance it. I think the near term FCF and improving debt markets make the debt a moot point. With the speculation of wide range Wifi, a strong internet option would benefit Sirius XM in the long run.
Very dangerous to offer a free service when your core base is paying subs.
The question always arises, why should I pay if I can listen to a version of Sirius for free? Much better to offer add-on service for paying subs. Whether those add-on services can be diversified into a Pandora-like imitation is open for debate. With no barrier to entry on the net, Sirius’options are certainly as wide open as anyone elses.
My preference would be a wider selection of internet channels. What stops Sirius from creating even 500-1000 internet channels? Absolutely nothing.
I don’t think over 3 billion in long term debt in an uncertain economic environment is a “moot” point…just sayin
I think you have some great insight and ideas here, which makes me even more excited about the future for this company. I do believe they have to put the capex remaining this year and next behind them, launch Satellite 2.0 before any possibility of buying one of these companies can or will happen. I also think the longer the wait, the better because they really don’t have a sustainable business model.
I meant Pandora or Slacker when I said “they really don’t have a sustainable business model”
“Muscle’s point about cannibalizing your customer base with cheaper alternatives is a very valid one in my opinion. This ship finally started gaining speed. Let’s not rock the boat and mess with the revenue base just yet. Cash flow is too critical for the company right now.”
I don’t disagree, but offering the service for free to subscribers would be an enhancement to their existing subscription increasing user satisfaction and “stickiness” to SXM.
Charging non SXM subscribers a small fee to cover the music royalty fees, and gaining access to that market…. say half of what Pandora has for actual listeners would give them access to a younger consumer. Pandora claims 60M registered users, I say active users is less than 20M….. if that. But enticing them with some Sat Rad discovery channels might increase the Pandora usage, while they pay a 1.99/mo. Might not be a bad way to get new subs on used cars, in the home, or on the Internet with a full subscription.
Besides buying Pandora removes Pandora’s model from the marketplace completely, while giving SXM their user base to market to.
Cos – If Sirius were to ever buy Pandora ( which I doubt) I would suggest they take it off the market as a free service and offer it as an add-on to existing sat subscribers.
If the standalone internet radio business model doesn’t work for other companies it won’t work for Sirius either. As an add-on to the Sat service, internet radio is an excellent ARPU driver and churn reducer.
I personally believe Pandora is a fad much like Broadcast.com was in the 1990s. Yahoo bought Broadcast.com for $5 Billion. Where is it now? It was early to the internet radio game and got inundated by hundreds of thousands of alternative internet radio options. Pandora was early to the smartphone apps and will similarly get inundated by the hundreds of thousands of internet radio apps that are about to go on smartphones.
It’s simply a bad business.
Muscle, My whole problem with the concept of buying either service is whether the software is such that it can be integrated into the SIRI content to be useful and enhance the experience. If it can’t then they will fall away and SIRI needs to capture the same experience with their own product with similar features….
Just that so far Mel hasn’t been willing to develop the software to match the experience…even in its delivery of Sat Radio its a pretty “bare bones” experience. Great Content, but you get what you get… I was a little concerned to hear that the 2.0, which I am excited about, won’t be out until Fall 2011 at the earliest. I am just wondering if they are timing this with full Satellite deployment (new features in the new sats. By the end of 2011 they will have launched 3 new sats in a little over two years time. That’s a system to run what they have now. Just seems like a long time to wait, but hey…. its not like their not growing there base because of it…..
Cos – I believe Sat 2.0 will be an attempt to show the FCC that Sirius can raise prices since they will be adding more channels.
New radio previews August 2011, FCC 3 yr mandated price freeze comes off August 2011.
Ryan hit on the “coincidental” timing aspect of this a couple of weeks ago. I think he is on target.
I’m hoping that at the end of next year, Sirius/XM will be able to raise their prices. I always thought $2/year would be accepted without much of a huff. The royalty fee of 1.99 didn’t seem too hard to swallow for most subscribers. Churn barely moved. If I were calling the shots (ie Mel), I would seriously investigate the possibility of raising the standard package by a little more, even $3/month, and THEN throw in free internet access as well in order to soften the blow. You’re paying a little more, but you’re getting more as well.
One very important point that we are skirting with our different scenarios and strategies is that we are illustrating how easy it will be in the future for Sirius/XM to compete with these guys like Pandora that the bashers say will eat Sirius’s lunch. By offering it free for added stickiness like you suggest, Cos, or by offering it for free along with a price increase in a year like I mentioned, either one of these scenarios, or many other possible scenarios, could seriously hurt Pandora. It is far too easy for these guys to have their wings clipped by forces out of their control. Sirius/XM has a unique and easily defendable position. It’s not just that they are the only Satrad company out there. It is much more than that. It is the 40 million or so radios already out there. It is the OEM agreements. It is the content. It is all of these things. Pandora and Slacker are technologies that can be leap frogged overnight.
Great topic. It deserves to be discussed in depth.
Your right dogstar…., so many possibilities and the real battle of the future is for the company to manage churn and find ways to add to ARPU as Muscle suggests. Even the recent projection by analysts that they will have 27M subs in 4 years, gives no explanation of how churn will be managed to get their.. Finding ways to keep customers once you have them is every bit as important as getting the new customer to begin with… Existing subs are SAC already paid, and keeping them will be the true success in the future when it comes to net revenues….
This is really an excellent topic. My opinion is Howard will be the difference maker on smartphone apps just as he was for sat radio. He will legitimize the business with his unique content.
Howard changes radio. He always does.
You’re right muscle, but am honestly starting to hate the name Howard Stern. Nothing to do with his shows or content or how much he’s paid. I don’t listen much, but I do respect him. I’m sick of everyone speculating on what he’s going to do. Lesson number one in management is that nobody is irreplaceable. I hope he stays, but he is human. He could get hit by a bus or something. It would be tragic, and not something I want to happen, but it does not mean that Sirius/XM would shut their business down if it happened.
Howard is irreplaceable. He is is the single most important talent in the history of radio, and Mel has mentioned that countless times.
Howard and Mel have been working together for 2 decades. Anybody who thinks that will change doesn’t follow radio.
Also Dogster – The issue with Howard is not whether he leaves radio and retires. As I have said to Demian, that is the furthest issue from the point.
The point is Sirius cannot compete against Howard. It is not the initial loss of subscribers that would destroy Sirius. BUT if Howard chooses to compete he can bring and radio sector to its knees, including sat radio.
What does Mel always say in interviews about premium content? It’s very expensive but he would rather have Howard and the NFL on his channels and see how he can make money with them rather than compete against them.
Simply put Dogstar, you compete against Howard you are done in radio.
Personally I am a typical Howard fanatic going back to the 80s. There are millions just like me. We are not loyal to Sirius or Infinity or Viacom or NBC. We are loyal to Howard. Wherever he goes we go. There is no question.
I agree that Mel and Howard respect each other and will most likely reach an agreement to keep him on board. I still think that there are at least SOME Stern listeners that also listen to music, sports, or some of the other content. I’ve been using someone else’s car the past couple weeks. It didn’t realize how long it had been since I listened to terrestrial radio. It was such a horrible and traumatic experience that I almost drove my car into the ocean to make it stop. I hope Stern stays, but if he leaves or retires some day, terrestrial radio will still make me want to dig my ears out with an ice pick.
Hypothetically speaking Dogstar, if Pandora chose to give Howard half ownership in the company and Howard went to Pandora instead of Sirius, where does that leave Sat radio? Competing with 60 million registered Pandora users and Howard?
Howard is irreplaceable. There is no doubt about it. You don’t compete against Howard unless you want assure yourself of losing.
I am very confident Howard stays with Sirius. History says it’s going to happen.
I’ve mentioned this a couple times in the past couple weeks, but it kind of touches on this topic as well.
The internet is a world market. Satellite radio only covers the U.S. These satellites give the the company a competetive advantage that can be leveraged off of to offer internet radio cheaper abroad than anyone else can offer. The cash flow from the US operations pay for all the studios, advertising, administrative, and all the other costs in the company now. Any part of that non-US market that you tap into, even if it was just 25 cents a month plus the royalty fee is going to be gravy. The only issues I see are ironing out international royalty agreements etc, and just not being so greedy that some countries make it into an anti-trust issue.
Let me make sure I am clear on my idea idea here: You do not offer ANY Sirius XM Content on the Slacker/Pandora platform unless they are a full subscriber to the primium internet service. Slacker/Pandora platform will stay exactly as it is now, except will be suplimented with advertisements for the Sirius XM Premium Internet service and for the radio subscriptions.
I don’t see that canabalizing anything. Still 2 seperate services, just owned by the same company. Sort of like it is now…
Any free internet radio service (and I do mean ANY) offered by Sirius is simply an invitation for Sirius subscribers to leave pay radio.
That’s bad business.
Couldn’t have said it any better.
Very interesting article with a great dialogue here on the comment board. Thanks to all for the food for thought.
My views on Pandora is that it’s smoke and mirrors at the moment.
I agree with Cos that even if they state 60 million registered users, it doesn’t mean that many people use the service. Basic Pandora is free, so it costs nothing to sign up/register (Hell, I have 3 hotmail accounts – so they may say we have 100 million accounts – I have 3). People use it because it’s free at the moment. Most people use it under 40 hours because they don’t even want to pony up the free dollars after that point. And I understand that Pandora now has to pay some type of royalties but it’s never been broken down how much. I heard even with all those ‘users’ and ads they barely make a profit (They don’t’ have Sirius debt payments or satellites to launch cutting into their profits).
The bigger difference to me between Sirius and Pandora is bandwith. Sirius owns it’s satellites so it owns it’s bandwith. To me that is huge. Pandora doesn’t. As AT&T and now Verizon have shown, they are starting to charge a tiered program for use for Smartphones. How much bandwith does a song take? When your phones already use a lot of bandwith, and you want to stay under a certain plan – than you have to cut back somewhere (I do know Iphone users that push against the 2 GB now). Sirius isn’t at the beak and call of others in this regard. They don’t put a limit on how much you can use per month. They don’t charge you extra if you listen to 100 hrs of music or more. And yes, some internet providers are rumored to be thinking of a tiered program also.
Hope this made some sense. Trying to do a little work while writing this .