What Lies In the Box For Pandora If It Agrees To Be Acquired By Sirius XM?

Recently there have been rumors about the Internet radio company, Pandora (NYSE: P) considering a sell out to its satellite radio competitor SiriusXM (NYSE: SIRI). The main reason being cited is the pressure from its major investors like hedge fund Corvex Management. Earlier this year in July, Pandora had declined an informal $15 per share offer from Sirius XM. Though Pandora has declined to comment on this, the company’s growing losses and tough competition might force the management to think on these lines in the future.

See our complete analysis for Pandora

Why Is Pandora Struggling To Bag The Profits?

• Pandora’s revenues have grown at a compounded annual growth rate of over 80% since 2010. On the other hand, its operating losses have also increased at a 60% rate, signaling that benefits of top-line expansion are not trickling down to the bottom line.
• As Pandora is primarily into music streaming, it has to pay a certain royalty fee each time a song gets played. This falls into Pandora’s cost of content acquisition which has risen at a similar rate as that of its revenues leading to swelling losses. The primary reason for this are the free users who are not yet directly contributing to the revenues, but only the costs.
• Advertising has been the major revenue source for Pandora, which despite showing 80% compounded annual growth since 2010, has not been enough to overcome the woes being generated from surging cost of content. To overcome this, Pandora has shifted its focus on to the subscription based model, but all is not rosy yet.

Stiff Competition Is Blocking Any Ray Of Hope In The Near Future

• To attract more paid subscribers, the company has jumped into on-demand music subscription service with ‘Pandora Premium’ at a subscription fee of $10 per month, which is the same as what Spotify and Apple Music charge for their services.
• However, Pandora will face a stiff competition while acquiring new customers, given that Spotify has a strong foot in the industry and already derives around $2 billion from its subscription revenues as opposed to Pandora’s $220 million as of 2015.
• In addition, Pandora has a music library of only 1 million songs, compared to the 30 million available with Spotify and Apple, which will make the subscribers think before paying the same price for less choice.

Huge Cross Selling Opportunity For Both The Companies

• Pandora is mainly an  internet radio company, whereas SiriusXM’s forte is satellite radio with pre-installed devices in the cars. There can be extensive cross-selling opportunities for both as there isn’t much overlapping of their domains.
• Pandora can take advantage of SiriusXM’s huge music library which can solve its content shortage problems without adding much to the cost of content acquisition.
• Whereas SiriusXM can boost its advertising revenues as Pandora leads the advertising division of the industry by scooping nearly $1 billion of its revenues from advertising, in contrast to SiriusXM’s $122 million and Spotify’s $219 million as of 2015.

New Opportunities Will Open Up, But Competition Stays

• Pandora’s nearly 4 million paid subscribers would be in addition to SiriusXM’s huge base of nearly 30 million subscribers. Moreover both combined will be able to provide internet radio, satellite radio and on demand music service to its customers which will be a unique combination in the industry that can help them attract new subscribers.
• The combined 34 million subscribers of both the companies would be double to that of Apple Music’s 17 million subscribers. However, it is worth noting that Apple Music was just launched in June 2015. This tremendous growth can be attributed to the massive sale of Apple phones, in which Apple Music comes installed. Same trend can be expected in the future, which gives Apple a fair chance to cross the subscription base of both the companies.
• Finally, Spotify has over 40 million paid subscribers and a bigger library along, with free ad-based unlimited music streaming.  Surely it will continue to pose a decent challenge to other participants in the future.

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