Is Trouble Brewing for This Radio Company?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Despite Apple's (NASDAQ: AAPL) iTunes radio, slumping iPhone sales, battles over licensing, and monetization issues, shares of Pandora (NYSE: P) have skyrocketed with gains of almost 80% in 2013. On Tuesday, the stock took its next leg higher, gaining 8.5% after encouraging service related news, which could be crippling for Sirius XM (NASDAQ: SIRI).

A Shift in Radio With New Competition

For the last several years, Sirius XM has had the privilege of having no real competition in its space. The company operates satellite radio, and comes standard in almost all U.S. manufactured vehicles. Thus, as auto sales thrive, as does Sirius XM.

Once a trial period is over, consumers have the option to subscribe, and Sirius has nearly 25 million subscribers. Since the recession, the auto market has been the single greatest strength of the economy, and Sirius has flourished with its subscribers increasing by more than 5.5 million over the last three years and its stock rising over 400% during that period.

The problem for Sirius XM is that it now faces real competition. Aside from Apple’s iTunes Radio announcement last month (with iOS in the car) Pandora is making a serious dent into Sirius’ market.

Back in 2010, Pandora announced a partnership with Ford to deliver its services in select models. On Tuesday, the company announced that Pandora is now available in more than 100 car models, which includes 23 automotive brands.

Moreover, Pandora states that it now has more than 2.5 million service activations! This is huge for the company. It shows that auto activations have grown four-fold from what it reported last year and is especially bullish considering that half of all radio listening occurs in cars.

In addition, Pandora’s investment outlook is judged in part on revenue per 1,000 hours of listening, or RPM. Last quarter, the company’s RPM stood at $25.31, up 34% year-over-year but 47% lower than the RPM achieved with PCs. According to Canaccord, the growth of Pandora in cars could catapult its RPM as much as 35% higher, which is most likely what created the 8.5% gain on Tuesday. 

Out With the Old & in With the New

Last quarter, we saw that Pandora did a much more efficient job at monetizing its revenue, and with its auto growth we might now see why. It appears as though the growth in auto is great news for Pandora (opening a new business) but could be horrible news for Sirius XM.

Aside from the fact that Sirius XM has never had to compete with any other company, it is using an old technology--more than 20 years old. In the past, radio had never been considered a technology, but now it is.

With that said, it is not just Pandora’s cheaper subscription price and “hear what you want” layout that could negatively affect Sirius, but also the integration of new radio services into the auto market. For example, many Sirius bulls will admit that Pandora may be more appealing to music listeners alone, due to the ability to custom-build stations. However, bulls still defend the company’s long-term outlook based on the talk radio segment that so many subscribers enjoy.

Unfortunately for Sirius XM, radio app developer TuneIn is planning to enter the auto space; and it specifically offers news, sports, and talk radio products. Then, add in the threat of iTunes Radio and its wide possibilities, and you have an outdated Sirius XM that is no longer superior to the available radio listening options.

Final Thoughts

For all I know, iTunes Radio could come in and completely wipe out Pandora, but if so then I am willing to bet it takes down Sirius XM in the process. In fact, I see very few scenarios where Sirius XM is not affected. The company controls the largest piece of the radio pie and has the most to lose with the introduction of new competition.

Thus, I actually like Pandora, even at $16 a share. It is trading at 5.6 times sales, which is actually cheaper than Sirius XM’s 5.9 times sales. Furthermore, Sirius XM has top-line revenue growth of just 11% year-over-year; Pandora grew 55% during this last quarter alone.

With all things considered, I think Pandora presents the better opportunity, and its 2.5 million auto subscribers is proof that trouble is brewing for Sirius XM.

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