Can Sirius Fight Off Apple, Google And Pandora?

| About: Sirius XM (SIRI)

Last week, I predicted that Sirius XM (NASDAQ:SIRI) would close at $3.60 or above. Things were looking good on Tuesday as the stock reached a five-year high of $3.63. But it was all downhill from here as the stock closed down 4% from the week's high and was down 2.5% in the for the week. But given that the stock is still up 21% on the year, there's very little to complain about.

Nevertheless, I need to point out a few things. I recently raised the argument that Sirius XM should capitalize on the growing demand for premium audio and seize this prime opportunity to raise its base price - I'm not diverting from that. Competition is beginning to heat up from (among others) Pandora (NYSE:P), which recently amassed 2.5 million paying subscribers.

Given that Pandora has been criticized for appealing to those who refuse to pay for premium level service, the fact that Pandora added 700K paying subscribers in the recent quarter demonstrates a higher level of demand for premium audio. There were many who rushed to disagree with the idea that Sirius should raise its prices - citing weak consumer spending and fearing that Sirius subscribers to leave by the busload.

Well, somehow "weak consumer spending" didn't impact Pandora. What's more, Google (NASDAQ:GOOG) just recently announced its "All Access" service to compete with (among others) Pandora and Spotify. Google's seems smart in its current introductory pricing structure. Customers that sign up before June 30 receive free 30 day trial for all new subscriptions -- the price is reduced from $9.99 per month to $7.99.

Given that there are still free alternatives out there. It will be interesting to see how much growth Google receives. But Google has the right model and seems unfazed by weak consumer spending. Meanwhile, there's Apple (NASDAQ:AAPL). It's highly anticipated that Apple will announce its plans to enter the premium music streaming market when the company hosts its Worldwide Developers Conference next week starting on June 10.

Apple, which already has the iTunes platform, is looking to leverage that popularity to strengthen an already dominant franchise. On Sunday, the tech giant reached a licensing agreement with both Warner Music Group and its publishing arm, Warner Chappell. This means that Apple now has deals with two major record companies. Last month it struck a deal with Universal Music. The only one that is left to sign is Sony.

I anticipate a deal will be finalized before June 10 and Apple's internet radio platform will inch closer to being realized. Apple has never been concerned about pricing. It understands that consumers will be for quality and value. To that end, Apple has made these deals more lucrative for the music labels and has opened its wallet to offer more money than what these labels receive from Pandora.

Plus, some of the features that Apple is expected to incorporate is the ability for listeners to easily purchase the songs. The record labels understand that if Apple is able to roll this service out worldwide, this can potentially increase the reach of the both the labels and the artists themselves. Unlike Pandora, which is seen as more of a "discovery" platform, Apple has the means to quickly monetize the service and squeeze out Pandora since Apple already gives the labels 70 cents out of every dollar it collects on iTunes.

Pandora's recent earnings report revealed that it had 70 million active users. This pales in comparison to the 500 million users that Apple, which amounts to $350 million that Apple would pay out to the record companies if each user buys only one song on iTunes. But it's like potato chips - nobody just buys one.

This now brings us back to Sirius, which has 24.4 million users, of which 20 million are paying for the service. In the most recent quarter, I noticed a sequential drop in the average revenue per user (ARPU). I believe that this is a sign that management needs another revenue source or figure out ways to generate more revenue from its existing base of subscribers - hence raise prices.

However, for Sirius, it's not just about making more money. It's also about maintaining the premium value that Sirius is known for. You have remember, in 18 months Howard Stern's contract is going to be up for renewal. Would Apple or Google go after him? How about Pandora or even privately held TuneIn, which is beginning to gain traction in the auto market. Not only has TuneIn secured auto deals with Ford, GM and Tesla Motors, but the company has received funding from (among others) Google.

The point is, TuneIn is an upstart just like Sirius was a decade ago. If TuneIn throws tons of cash at Howard Stern, who is often credited for Sirius' early popularity, wouldn't Stern's ego make him think that he can do it again? It's not as if Stern and Sirius have been on the best of terms, given some recent court battles. Would Stern not use this as leverage to demand more money?

Stern is only one example. What if Apple or Google goes after the NFL or Major League Baseball? Sirius will need to raise prices to prepare for these decisions and I believe the company will. And the recent sequential drop in ARPU, which was the result of aggressive discounts, is an indication that additional revenue is needed.

Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.