Pandora’s In-Car Installation Is No Danger to Sirius XM

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The world’s largest car radio service provider, Sirius XM Radio (NASDAQ: SIRI) could be facing a serious threat to its business following Pandora Media's (NYSE: P) latest milestone in car radio. Pandora, the leading internet radio service provider, is taking a huge step towards in-car radio integration. The company recently announced that it had reached 2.5 million car users, just weeks after Apple (NASDAQ: AAPL) launched iTunes Radio at the WWDC event in California.

Apple’s iTunes radio challenges Pandora’s dominance in internet radio services. Pandora’s latest milestone in in-car users means that it is well set to battle Sirius XM in the car radio business. The question is; should Sirius XM worry about Pandora’s achievements thus far? Judging by the 2.5 million users, this is nothing to worry about for Sirius XM. However, when we assess Pandora’s plans of having at least 100 car models integrated with its internet radio service, then that might be a long-term threat to Sirius XM’s business.

Sirius XM won’t be easy to catch

While Pandora is fashioning strategies to challenge Sirius XM’s car radio business, the New York-based satellite radio service provider is already growing its competitive advantage. The company has launched an app for in-car internet radio as it increases the modes of offering car radio services. This strategically puts Sirius in a comfortable position to see off the threat posed by internet radio service providers like Pandora and now Apple, among others.

Sirius XM has also introduced a two-month free trial program for its customers. The program, which begins this summer, allows dealers to offer a complimentary two-month Sirius XM subscription to qualifying service customers.

New and used-vehicle owners who take their vehicles to dealerships for service are set to benefit from the two-month trial subscription, depending on how long their vehicles have been inactive. Even new vehicle owners who refused to renew their subscription will be eligible for the trial program depending on when they last renewed their subscriptions.

Sirius XM is now focusing on getting more subscriptions from pre-owned vehicles, as a majority of the new car models now come installed with its radio service. The only challenge to Sirius XM’s new car subscriptions is that the conversion rate is still too low, oscillating at 44% and 45% compared to the 70% penetration rate. This is perhaps the reason the company is widening its penetration rate as conversion has remained flat over the last three years.

It is the depth in options for increasing subscription base, which give Sirius XM the ability to cope with any challenge emanating from industry rivals. Nonetheless, unlike before, Sirius XM cannot afford to lay back and let things slip because Pandora and Apple’s iTunes radio will be waiting to pounce.

Pandora expects to have one-third of new cars sold in U.S.installed with its internet radio by the end of this year. This is a good milestone for the company, especially considering that Apple has already started encroaching on its internet radio business. Pandora is the king in internet radio, and even Apple will find it difficult to convince a majority of the people to subscribe to its iTunes radio. Some even are branding it the “Netflix of Radio.” Nonetheless, its attempts to dethrone Sirius XM as the leader in car radio service are bound to be difficult.

Apple’s iTunes radio, on the other hand, will take time before it manages to report any relevant income for the iPhone maker. This is partly because the free ad-backed subscription service will depend on the company’s ability to monetize the service. It would be interesting to see how Apple positions itself in the battle for car radio services, as it continues to integrate its iOS and Radio-out feature in major car models.

Performance 

With a workforce nearly half of Sirius XM’s, Pandora is quite a small company compared to its rival. Nonetheless, based on revenue growth rates, Pandora’s 55% year-year-growth for the most recent quarter trumps Sirius XM’s 12%. However, the company’s operating loss of 10% for the trailing twelve months, compared to an operating profit margin of 26% for Sirius XM shows which company is yielding returns to its shareholders.

On the other hand, Apple’s profit grew 11% year-over-year for the most recent quarter. The iTunes-internet radio service provider has an operating margin of 31%. Nonetheless, it would not be appropriate to judge Pandora and Sirius XM’s performance based on Apple. This is because the two radio service providers compete with a small fraction of Apple’s business.

The bottom line

I would like to think of Sirius XM’s car radio service as Google’s Android platform for smartphones. Only that unlike Android, Sirius XM's radio service is subscription-based. Nonetheless, the company’s market share in the business is as gigantic as any that you can think of, and seems set to remain that way in the near future.

Nonetheless, with Pandora now beginning build momentum in integrating its services in new cars, there would be an interesting battle between the pair, while Apple’s iTunes Radio remains a long-term prospect. However, for now, Sirius need not worry about Pandora, but concentrate on what it does best. 

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Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool recommends Apple and Pandora Media. The Motley Fool owns shares of Apple. 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!

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