One of the strengths of Sirius XM Radio (SIRI) has been its pre-eminent position in car dashboards. Not only does the company have relationships with most OEMs, but it is also currently installed in two thirds of new vehicles sold or leased in the US. The buyers of these cars get to experience the benefits of satellite radio for a trial period from three months up to three years, after which they are targeted through a direct marketing campaign that attempts to convince them to continue the service for a base monthly fee of $14.49 plus a Music Recovery Fee of $1.81 per month. Currently, the company has convinced more than 20 million listeners to pay it for the service.
And, it's not just new car buyers that are targeted by the Sirius XM direct marketing machine. In recent years, the company has aggressively pursued subsequent owners to also pay for radio. Currently, more than 10,000 dealers of used cars are participating in a program that offers a 90-day free trial, and partly as a result of the efforts in this space, the company expects to generate 1.5 million gross additions to its paying subscriber population.
Sirius XM has worked diligently to maintain solid relationships with the OEMs. However, recently, the company's dominant position has come under increasing pressure. Not only did Apple (AAPL) make an announcement about the integration of iOS 7 in a dozen brands beginning with the 2014 model year, Pandora (P) has been making headway by continuing to expand its relationships with car manufacturers.
To date, Pandora has seen more than 2.5 million unique activations through integrations from the 23 major automotive brands and 8 aftermarket manufacturers with whom the company has established partnerships.
Pandora recognizes the importance and potential of the automobile space, and the relationships with car manufacturers dates back only to 2010. The recent press release notes:
Approximately half of all radio listening takes place in the car and the ability to seamlessly deliver Pandora through the native in-dash entertainment system has remained a key focus for the company since announcing its first automotive brand partnership with Ford in 2010. The company now estimates that fully one-third of all new cars sold in 2013 in the US will have Pandora installed, including over 100 vehicle models made available from Acura, BMW, Buick, Cadillac, Chevrolet, Ford, GMC, Honda, Hyundai, Lexus, Lincoln, Mazda, Mercedes-Benz, MINI, Nissan, Scion, Suzuki and Toyota. Pandora listeners can also look forward to future integrations in Dodge, Infiniti, Jeep, Kia and Ram vehicles.
Many of the fans of satellite radio will be quick to point out its advantages relative to Pandora. The convenience of 140 channels of curated content, commercial free music, no dependency on spotty cell phone service, exclusive content, a suite of Hispanic targeted stations, no data charges, etc. And, to many of the more than 20 million Sirius XM self-paying subscribers, these are sufficient reasons to pay for the service.
Many others won't pay Sirius XM prices. For them, there are a growing number of alternatives. Besides Pandora, Ford (F) has integrated Stitcher, OpenBeak, iHeartRadio, NPR News, TuneIn Radio, Slacker Radio, Scout by Telenav, Rhapsody, Aha, MLB.com At Bat and USA Today into its in-dash infotainment systems. And if all this wasn't enough, Apple iTunes Radio will likely grab a large slice of mindshare when it rolls out in the Fall.
Before investors start bringing up the issue about how Pandora isn't relevant because they are losing money, it should be remembered that most listeners to the service don't really care about the company's income statement and bottom line. Racking up $8 billion of losses didn't deter Sirius XM Radio from growing to more than 24.3 million total subscribers. The only significant way losses are relevant over the near term is if some listeners get turned off and decide to tune out because the royalty structure affects playlists, or if commercials are a major issue and listeners are forced to endure more commercials. Clearly, this has not stopped Pandora's growth to this point in time.
And, there is little reason to believe that Pandora won't continue to try to lower costs and renegotiate lower royalty fees. Pandora has been lobbying Congress for changes and is also reported to be exploring other avenues to reduce those fees.
While Sirius XM has managed to place its satellite receivers into two thirds of the new vehicles Americans acquire each year, it does not own the dashboard. Ford may have been the first to recognize the importance of offering choices to consumers when it linked up with Pandora in 2010, but other OEMs have followed. And, despite Sirius XM having an sizable head start, Pandora has managed to provide its alternative in one third of all new vehicles, and that percentage will be growing.
Competitors - whether it's Pandora or Apple or some other yet to be announced major player - may not be able to match the breadth of content or extensive coverage offered by Sirius XM, but they certainly provide potential subscribers with an ever-expanding variety of choices. I don't expect that the most ardent fans of the Sirius XM service will suddenly start a mass exodus for these other choices. There are many who find the service indispensable and the company will continue to satisfy a large segment of the population, but growth should become increasingly difficult.
Expanded choice is great for the OEMs and great for those that spend a lot of time in their cars. It's not quite as good for investors in Sirius XM.
Additional disclosure: In addition to my long positions, I have January 2014 $3.50 covered calls written against most of my long positions in Sirius XM. I also trade blocks of Apple and Sirius XM on a regular basis. I may sell other $3.50 covered calls against my Sirius position at any time. I have no positions in any of the other companies mentioned in this article.