Investing in Your Music Choice
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every time payday rolls around, people deduct necessities such as rent and mortgage payments, groceries, and utilities. Even with a longer list of expenses, some consumers are fortunate enough to have extra cash to spend on entertainment. Options are numerous and expensive in today's world of tech, but with an internet connection comes the golden ticket of music that is Pandora Media Inc. (NYSE: P). It is an extremely popular service, but competition is everywhere.
Sounds of Sharing
Nearly fifteen years ago, I built up my high level of patience by waiting for my dial-up connection to download songs from Napster, discovering generations of music without leaving my computer chair. Peer to peer sharing clones followed, but eventually this world of free music was dead (temporarily of course).
Many millennial college graduates aren't strangers to file-sharing programs that operate within university servers. If those don't work, public choices include torrents, websites such as freshnewtracks, links on social networks, and YouTube file converters. In my experience, some of these sites are deemed unsafe by Google's (NASDAQ: GOOG) Chrome browser, so I stay away. However, a superior alternative has arrived in the form of internet radio.
According to analysis firm Trefis, advertisements account for nearly 78% of Pandora's stock price. Other than a short interruption in listening every five songs or so, it costs nothing to the user. As of April 2013, Pandora had 200 million registered users for its "Music Genome Project," which consists of over 800,000 songs from over 80,000 artists. Even with this pool of selection, some choose to pay for a premium account, which offers an ad-free experience with higher sound quality.
Pandora may not be an ideal investment yet (it's cash flow is negative), but the concept and delivery is promising. Mobile device streaming is growing along with mobile advertising, which are both aided by the fact that smartphone sales are expected to exceed 1 billion in 2013. Finally, with the automobile industry looking up, Pandora has formed relationships with companies such as Ford Motor Company to expand listening to the road.
The Best Radio on Radio
Pandora can't be mentioned without a discussion of my favorite entertainment service, Sirius XM Radio Inc. (NASDAQ: SIRI). I am one of the lucky ones to have a lifetime subscription, which has long been scrapped, but at the time cost me a one-time fee of $500. Without that deal, the monthly rate sits at about $15, but less if service is purchased for a year or longer. Sirius features outstanding programming, but for potential new subscribers it can be daunting to fork out cash when music is available from endless providers for free or at a less expensive price.
However, Sirius offers more than music and has established itself as the best, which is a point of interest when considering the 50 million shares traded per month, according to Morningstar. The stock has made an incredible run from a little more than a dime to well over $3 per share, but many fear growth will hit a wall. There are ad-based competitors beyond Pandora that pose as threats, and now Google and Apple have entered the fray with All Access and iTunes Radio, respectively. Sirius has the opportunity to continue expansion to mobile platforms, car manufacturers, and maintain its programming quality with its $700 million in free cash flow. If the company can continue to innovate, investors may be rewarded. Until then, I will enjoy the music but stay on the sidelines as an investor.
Free has Worked Before
I stand by the "no free lunch" mentality and know that everything comes with some kind of external or indirect cost, but I can Google something right now and the size of my wallet doesn't change. This behemoth takes ad revenue to a new level, generating over $43 billion in 2012. If a website is used widely enough and continues to innovate, profits will flow. Instead of forming partnerships and depending on others for growth, Google keeps much of its revenue in-house, holding steady at around 68% from Google websites for three years.
Google averaged over 5 billion searches per day in 2012, but from Android development to YouTube progression, the company knows no limits. With cash flow at over $13 billion in 2012, shareholders anticipate a dividend at some point. Because of that potential and market demand, shares are not cheap at 25 times earnings, but Google is dominating more than ever because of continued innovation.
The subjects may differ, but when it comes to using the internet, one would never pay to search something. Premium music experiences offer fantastic services but have proven difficult to sustain as the history of Sirius XM Radio demonstrates. Websites always come with above-average risk for the long term, but innovation fuels continued success.
As one of the most dominant Internet companies ever, Google has made a habit of driving strong returns for its shareholders. However, like many other web companies, it's also struggling to adapt to an increasingly mobile world. Despite gaining an enviable lead with its Android operating system, the market isn't sold. That's why it's more important than ever to understand each piece of Google's sprawling empire. In The Motley Fool's new premium research report on Google, we break down the risks and potential rewards for Google investors. Simply click here now to unlock your copy of this invaluable resource.
Kyle Vaughan has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!