There is a considerable amount of attention being paid to the audio entertainment playing field lately. The two largest players outside of AM / FM are often compared as competitors and to an extent this is true. Pandora (NYSE:P) and Sirius XM (NASDAQ:SIRI) certainly both compete for listeners now, and will do so to an increasing extent in the future.
I dread it...
While I often dread the typical comparisons of Pandora and Sirius XM, it's hard to argue that each company operates within worlds that do not collide. If you own a smartphone, and a car, you have a multitude of options available to you to either receive or stream either service. For many, the service is built right into their dashboards or available to them with an add-on kit or cable. And while most of us have two ears, the way the human body works tends to mesh best with a single source of audio entertainment.
That presents choice, and because of that individuals are often forced to choose either Pandora or Sirius XM.
I'll be clear. I'm a Pandora bear at present and a Sirius XM bull. So understand that before reading the following. I can't afford to be biased with my investments, though, so I certainly take the entire audio entertainment landscape seriously. Simply stated, brush off my opinion here if you like, but thought provoking conversation might be a better course of action for those who agree and disagree.
I was compelled to write this piece after two things got me thinking today. First, my girlfriend recently dropped her Samsung Galaxy S2 and cracked the screen. My attempts at ordering a new piece of glass and fixing it ended in failure, and we found ourselves at the AT&T store this evening picking up a new S4.
In the process we reviewed her plan, and I noticed she used 5.5GB of data last month resulting in $40 worth of overage charges. The previous months had only gone over by $10. The answer to the difference? Pandora. She is currently working a job where she uses her phone to stream Pandora for a couple of hours a day plus her time at the gym and some outdoor activities. Let's say nearly 3 hours per day of streaming on average. Streaming music essentially cost her $30 of overage charges last month due to between 2GB and 3GB of data usage. Average for a Pandora user? Unlikely, but this places her yearly cost for Pandora (with advertisements) at $360 per year.
A quick visit to any mobile carrier's usage calculator will show similar usage results for streaming audio. If you stream 60 minutes per day (let's call this "commute time") then you can expect to use above 1GB and below 2GB of data for this streaming. Your cost for Pandora, then, is $20 per month or $240 per year.
This is undeniable. Streaming music through mobile costs money at an average rate of $0.66 per hour ($240 per year / 365 days, assuming 1 hour per day). This is considering the free versions with advertisements. Add on $36 per year to remove those ads and your cost to stream turns into $0.76 per hour.
Why should investors in Pandora care? Because the landscape is competitive and many users will be cost conscious. As time wears on, individuals will figure it out that streaming costs money, and lots of it. Poke around of some web pages, watch a couple videos, and use navigation a few times and you are going to use a GB or two of data per month. Streaming audio adds to cost, it is not "free."
And that leads to the second thing that compelled me to write this piece. It doesn't seem that investors (or users) have quite caught on to the fact that streaming radio through mobile costs such a large amount of data, and thus costs such a large amount of money.
Just take a look at fellow contributor Siddartha Dalal's most recent article :
And the beauty of Pandora is that it is free or if you do pay, it covers both your online listening and your car listening. Sirius charges you an extra $3.50/month (comparable to Pandora) for online listening in addition to their regular monthly fee starting at $14.49/month. Pandora savings will easily cover any extra data costs.
Obviously he's missing something, or he has not done his homework as to the actual costs involved with additional data required to stream music. A simple trip to Verizon's website and 30 seconds using their calculator will show an estimation of 1.8GB per month of data, or $20 worth of data, is used by streaming 1 hour of audio per day. If we take monthly costs of listening to Sirius XM in the car at the rate of $14.49 per month plus the $1.81 music royalty fee charged, for a total of $16.30 per month and compare this to a Pandora subscription, the difference in results are striking at just one hour of listening per day. While Sirius XM's cost is $16.30 the estimated cost for 1 hour per day of mobile Pandora One (ad free) usage is $23 per month.
That's 41% more to listen to Pandora.
That's a problem.
The problem here for Pandora is if one has a longer commute, the difference grows considerably. Just 30 minutes more per day will add $10 in data charges, pushing Pandora's cost to $33 per month, or more than enough to pay for two subscriptions to Sirius XM. This floating cost for Pandora is completely out of Pandora's control without significant increases in data compression and thus loss of audio quality. Pandora is content only and is slave to the delivery. Ask yourself who makes more money if Pandora is used an hour per day? Pandora, or the mobile carrier?
The problem is that the assumption that Pandora is free while traveling in a vehicle is incorrect. And it's an assumption that is often made by users and investors alike. Because of this I ask myself how long before people begin to realize the actual costs involved? In order for Pandora to be free, data would have to be free or current data plans would have to reduce in costs or grow in data caps to the point that 2, 3, 5GB per month becomes meaningless to the end user because it falls within their plan.
This is highly unlikely to happen anytime soon. My evidence? The lack of any supporting evidence that mobile data is to become significantly cheaper on the visible horizon. Sometimes the inability to link a counterpoint is some of the best evidence that your own point may hold considerable weight. Mobile data has a very long time to go before it becomes nearly free.
And this is one of the main reasons I am invested so heavily in Sirius XM. I believe that the company will retain a significant hold on in-car listening for the foreseeable future. Its ability to provide true unlimited listening for one flat rate per month is superior to streaming only services which piggyback off of expensive data plans which can balloon in cost for anything but light or occasional users.
It's a great service, but I question the viability of the business.
To be honest, if you are considering tossing around about $30, I'd actually suggest subscribing to and using Pandora for a month and keeping away from it as an investment. The service is enjoyable (I have an account myself and listen at night through my television), but it's certainly not cheap for the mobile user, and it is absolutely not "free" for the mobile user. AM / FM is the true "free" option, and Sirius XM is the compelling cost effective choice for premium radio. That's enough to keep me away from Pandora as an investment today.
Investors in Pandora may wish to consider taking a cue from insiders at the company and consider selling into the strength of the current share price.
If you wish to invest in streaming audio, I'd even go so far as to argue that you should invest in the mobile carriers who actually profit from its use, and don't lose money through greater usage as Pandora has.
But if you're a cowboy and a risk taker, you may want to aim higher on the chances that investors will show irrational exuberance with Pandora's stock, or on chances that this writer is ultimately dead wrong and the company catches up to its share price. I'll certainly tip my hat to you if that is the case, and admit I was wrong as I ride off into the sunset.
Additional disclosure: I am long SIRI through various options.