By Relmor Demitrius -
A lot of press has been issued of late about the upcoming Pandora IPO. The Internet Random Music Generator Company, which gives about half of every penny in revenue directly to pay royalty charges, is planning on selling shares in the company on Wednesday. They are offering 14.7 million shares at around $10 to $12 a share. This would generate around $147 million. As per filings when the offering was announced, part of the money will be to simply repay venture capitalists and another portion expenses. The balance will be held for general corporate purposes. Only around 20% of the company’s equity is being offered here as well. For a company that has never made solid profits there seems to be a lot of buyers offering cash to invest. Is this money what would have been directed at Sirius XM Radio (NASDAQ:SIRI)? Is Pandora even competition for Sirius XM Radio? I believe the answer to both those questions is no.
Institutional ownership in Sirius XM was show in Q1 of 2011 to be approximately 38%, up from 20% just a little over a year ago. With the average price in that time being around $1.50 a share, that is an influx of 700 million shares versus what was sold. That comes to over 1 billion dollars in new money in around one year’s time. Pandora’s IPO seeks to generate $147 million total revenue. Some of that value is instantly gone as it is simply paid to venture capitalists. So as you can see, based on this, Pandora’s IPO wouldn’t be detracting significant funds away.
Looking at total daily volume on Sirius XM right now, as a 3 month average, it is coming in at 80 million shares a day. With an average price lately of let’s say $2 a share, that is 180 million dollars a day being traded in Sirius XM. That is more than the total value of the offering entirely from Pandora. This is small potatoes folks. Were are talking apples and oranges here. One company could buy the other with one quarter of free cash flow and the other is struggling to make money in a free and advertising business model. Let us compare this in other ways however.
Mel Karmazin, CEO of Sirius XM Radio, likes to show slides of how Sirius XM compares to its competitors in the same space. I always felt this was a tongue in cheek use of the word, “competitor”, as these numbers clearly show the only real competitors Sirius XM has is terrestrial radio. Total radio revenue in the sector is 18.8 billion dollars. Sirius XM has 15% of that, all internet radio companies have 5% of it, and terrestrial radio has 80% of it, when it was almost 100% in 2001.
Of subscription radio companies, Sirius XM receives 2.8 billion of 3.1 billion total dollars. The other .3 billion is all internet radio companies combined, not just Pandora. That includes Slacker, I heart Radio, Rhapsody, etc…
The actual number of subscribers that use all forms of radio subscriptions, comes in at 20.6 million for Sirius XM, less than 1 million for Spotify, 750,000 for Rhapsody and less than 500,000 for Pandora.
Sirius XM receives $141 a year per subscriber, Pandora receives $1.68 per user, and Clear Channel receives $13.61 per listener. Sirius XM monthly average intake per subscriber is $14.50.
One can argue true, but Sirius XM has huge operating costs. Correct. But they are static for the most part. Other than fluctuations in OEM acquisition costs based on how many cars were sold in that quarter, Sirius XM’s cost side is very predictable from here till 2017 when they will begin spending money again on new satellites. They also have many unexplored avenues to cut costs still yet to play out. With predictable costs profit margins can be easily estimated. Although a high share count prevents Sirius XM right now from having attractive earnings per share, their free cash flow and EBITDA guidance 1 year out is exceptional for the sector. Their EBITDA will be around 850 million dollars by the end of 2011. Pandora’s total revenue for the year was $137 million. Once again, this is apples and oranges.
Pandora would have a hard time creating a significantly better product as well. With Clear Channel having major debt concerns, Sirius XM could also be poised to steal a lot of talent on the cheap in the coming months. Even Rush Limbaugh has been rumored to be jumping the sinking ship of Clear Channel. It is easy for Sirius XM to add channels (they just added a slew of minority interest channels including Latin American choices) or talent to create more value.
Other things that separate Pandora from Sirius XM are that Sirius XM is a content driven service, with data services that cannot be offered in the Pandora model. The ability to give live interaction, requests, weather, sports, talk radio, live broadcasts of CNN, CNBC, and countless other stations really gives little to compare with. One service generates random songs and the other is actual radio. Radio has always been to be a two way communication medium. Personalities, contests, live events, the ability to interact or listen to the same thing as your friend is hearing, all this goes into what radio is. It’s not just playing music. The coverage area is a whole other topic as well. Don’t even get me started on that one. Data charges are also a huge negative to the model, as it relies 100% on internet and mobile devices are a huge driving force in its usage.
Another point is Sirius XM is basically a monopoly, whereas Pandora has many competitors with similar services on the same medium.
All that being said, Pandora I’m sure is a nice product many people enjoy. I am not writing this to bash Pandora and talk about its shortcomings, of which it has many. I for one do not like it at all. This article is in response about the talk that this IPO is affecting the trading of Sirius XM, and is it even competition for the company at all. Sirius XM lists Pandora as a competitor, but it also lists MP3 players and Ipods. They are thorough and when Mel says he sees no acquisitions that make sense for Sirius XM, you can be darn sure he knows what Pandora is when he says that. Well Mel, I would have to agree with you here my friend. Nothing to see here, let’s move along shall we.
Disclosure: Long SIRI
Excellent article Rel. You really called it like it is Relmore.
I find these Sirius vs Pandora comments amusing. Reminds me of similar comparisons back in 2000 of Amazon with the book publishing industry.
Barely worth reading an article that claims that Pandora and Sirius aren’t competition. It’s one of the most rediculous statements that gets posted over and over again. By definition, they are competition. If Sirius didn’t exist, Pandora would have more listeners. If Pandora didn’t exist, Sirius would have more listeners. And if you don’t like that argument, here is another…Pandora/Sirius is much like Cable/HBO. Many people are happy to get both Cable and HBO, but the fact that most people’s TV needs are satiated from Cable makes those people less likely to pay for HBO, even if they can get content unavailable to them thru Pandora. And, of course, as Pandora expands to other markets than music, they will be more competition for Sirius.
I’m long Sirius, and don’t consider Pandora a THREAT to Sirius, but they are competition, and to claim otherwise is just moronic.
Rel, nicely done … way to put this topic in perspective.