Sirius XM (SIRI) shares tumbled late in the afternoon Tuesday for what appeared to be no reason. There actually was a reason. Sirius XM is tied at the hip with Liberty Media (LMCA), and Liberty Media lost a promising contract bid with Disney (DIS) to Netflix (NFLX). At first blush a Sirius XM investor may not see the connection, but scratch a bit deeper and you can see why at least some concern is warranted.
The deal between Disney and Netflix represents the first time that a major studio has bypassed cable outlets and cut a major deal with a service provider that provides its content online. That is quite interesting. Certainly, Netflix did pony up a pretty penny for the deal, but nonetheless, it now represents what could be a game changing moment that impacts not only television, but audio entertainment as well.
What would happen if terrestrial radio talk giant Rush Limbaugh were to cut a deal to stream on the likes of Pandora (P) or Slacker instead of sticking to his terrestrial roots or venturing over to Sirius XM's satellite delivered service? While it may not seem likely, people will indeed move platforms if the price is right. Howard Stern left terrestrial radio for a $500 million deal with Sirius about 6 years ago. The fact that Disney has not only entertained such a concept, but actually cut a deal with an IP delivered service is compelling and meaningful. It could serve to set the stage for other IP providers to get creative and bold.
Slacker has been on the cutting edge of IP delivered content for quite some time now. While the service does not enjoy the same name recognition as Pandora or Sirius XM, it has been offering compelling On-Demand services long before its better known siblings. Aside from music Slacker offers comedy, talk, customizable ESPN and customizable ABC News. In many ways Slacker has been a leader in audio entertainment. In fact, even as a Sirius XM subscriber, I enjoy Slacker and listen quite a bit.
No, the Disney and Netflix deal is not an immediate threat to Sirius XM. Nor is it actually an immediate threat to Liberty Media. In fact, the deal does not even take effect until 2016. That is 3 years away. A lot of water will pass under the bridge between now and then. It is worth noting though.
There was once a day when satellite radio was just like Netflix. Trying to establish a foothold and finding a way to grow. Like Netflix they were aggressive with their wallets, and spent premium dollars on the likes of the NFL, NBA, NHL, and MLB. Both satellite radio providers were also aggressive in getting into the automotive channel. GM was the first "big boy" to adopt a fledgling XM Satellite Radio. The GMN deal, still in effect today, is the most expensive deal in the OEM channel. GM has reaped the rewards of an XM that needed the automaker to get onto the map.
This is not a doom and gloom piece, nor is it calling the beginning of the end. Instead, it is calling a shift in the dynamics that perhaps we have all grown used to. While there are writers that have said IP delivered content will never threaten satellite radio, and writers that have called for the death of Pandora for years, the reality is that we are in an ever-changing world. There will always be another up-and-comer to challenge the king of the hill. Many will fail in the process, but one lucky punch is sometimes all it takes. I hearken back to Sirius XM landing Howard Stern.
Even if Pandora struggles to make a profit, it still exists and is competition to Sirius XM. If Apple (GM:APPL) decides to go into a more classic form of audio entertainment, which has been rumored, it is something that the satellite radio company and its investors need to be aware of and thinking about.
Sirius XM has many advantages. IP delivery in the car is not perfect as yet. Caching content helps, but consumers in the car want a seamless solution and right now Sirius XM is as close as you can get to that. The landscape is changing quickly though, and technology is as well.
The very fact that Disney cut a deal with Netflix needs to be on your radar screen. It may be a very faint blip on the very edge of the screen, but it needs to be there and warrants your attention as an investor. Netflix was a company in dire need of some fuel for its fire. It found it by cutting a deal with Disney. If the royalty rate for music is not settled soon, Pandora could be in a more desperate situation. Their first defense may be to charge consumers, but somewhere along the line Pandora may well follow the lead of IP sibling Slacker and get into non-music content that has been such an advantage for Sirius XM.
With all of that being said, Sirius XM is still setting up for a compelling Q4 as well as a wonderful 2013. The lesson here is to pay close attention to the intricacies of the sector. They do carry an impact on how Sirius XM does business.
Additional disclosure: I have no position in APPL, NFLX, P, DIS.