Sirius XM - Google Is Becoming A Huge Threat

Dec.31.13 | About: Sirius XM (SIRI)

The news dropped on Sunday night. The Wall Street Journal released an extensive article detailing how Google (NASDAQ:GOOG) is set to announce plans and partnerships in an effort to crack into the growing connected vehicle market. Google intends to leverage the flexibility and popularity of its Android operating system into gaining a stronghold in this growing and extremely lucrative market. I have written extensively about the nascent revolution in the car market, poised to occur over the next 5 years, as all new passenger vehicles will eventually be sold with built in internet connectivity and extensive entertainment and telematic options.

Sirius XM (NASDAQ:SIRI) likely has the most to lose from this recent announcement. The company has seen the potential of the market opportunity and made a bold move earlier this year with the purchase of telematics and in car diagnostics technology provider Agero Inc. Combining this service with the current satellite radio offerings, and taking advantage of deep rooted partnerships will all major vehicle manufacturers should have positioned the company well to be a dominant player in the connected vehicle market. But the recent entry of Google will prove that the road forward will not be as smooth as anticipated.

Google Makes It's Move

From the Wall Street Journal article, we can expect that Google will announce some time next week that it intends to position Android as an "important technology for future vehicles." The main goal will be to "allow drivers and passengers to access music, navigation, apps and services that are similar to those widely available now on Android-powered smartphones." Given the massive popularity of both Google and Android, this will be a major step towards creating a standard in the connected car software market and it might be a major hindrance to other players trying to enter the market.

So far, the vehicle partnership seems to be limited to a development agreement with the German car manufacturer Audi. But from a technological standards perspective, Google is also expected to announce agreements with other companies, such as Nvidia, to help in the development and adoption efforts.

"The car is becoming the ultimate mobile device. Apple and Google see that and are trying to line up allies to bring their technology into the vehicle." Thilo Koslowski, analyst, Gartner Inc

Considering the massive size of the connected car market, it was not a huge surprise that some of the biggest tech players would make a move to tray to enter the industry. Apple (NASDAQ:AAPL) already has some partnerships in place with BMW, Daimler, General Motor (NYSE:GM) and Honda (NYSE:HMC), in order to facilitate in-vehicle interaction with iPhones and other devices running iOS. So far, the scope of Apple's ambition seems to be limited to using Apple devices as a means of streaming content to a vehicles dashboard control system without directly integrating Apple within the vehicle.

"We are starting to see an uptick of Android use in car makers, starting in Asia and working its way across the world," Rajeev Kumar, Freescale Semiconductor Inc

It seems like Google might have more comprehensive plans. If it is able to position its Android operating system as the de-facto standard technology embedded and used by the actual dashboard system, it would have much more control of the apps and content options available within the vehicle. Given the fragmentation within the vehicle manufacturing industry, it would be possible for more than one standard to survive, but as with most other technologies, it would likely come down to a market dominated by only one or two main players.

The Threat To Sirius XM

Sirius XM had high hopes of being one of the dominant players in the connected car industry. It can be argued in many ways that Sirius XM is already the leader, as it has almost 26 million paying subscribers connected to its nationwide satellite radio network. With the purchase of Agero Inc, Sirius XM is poised to expand its current offerings and broaden the connectivity options of its services. It's a great plan, but can investors really expect the company to be able to make this massive technological move before Google has time to penetrate the industry? That is perhaps the most important uncertainty facing Sirius XM in the years to come.

While Sirius XM currently has the broadest programming options of any radio provider and it has a deep roster of talented and exclusive in-house produced radio personalities, it likely does not have the technological clout to go head-to-head with Google. And there is only so much space available on a car's dashboard. Will it really be a viable option to have both a Sirius XM satellite receiver as well as a fully functional and connected Android based entertainment system embedded in all vehicles? If Google is able to develop a sophisticated dashboard entertainment system and forge OEM installation agreements with major automobile manufacturers, it poses a serious threat to Sirius XM in the years to come. Sirius XM may be best advised to become partners with Google rather than enter into a war for market share.

Best Case Scenario

Google and Sirius XM have dabbled in some small working partnerships before. In 2012 it was announced that Sirius XM would make all of its content available on Google TV. The move was considered as a way for Google to add content and credibility to its languishing television dreams but offered minimal incremental value to Sirius XM. If Sirius XM and Google could build a partnership to lead the connected car revolution, the impact on the industry would be huge and be a massive benefit to both companies.

A dashboard running Google Android operating system and offering Sirius XM as an exclusive pre-installed radio option would, with one stroke, legitimize Google as a de-facto connected vehicle technology provider. From Sirius XM's standpoint, getting premium placement within the console would help drive subscriptions and increase customer usage and interaction. Furthermore, while Google has an industry leading mapping service and a huge presence in the cloud computing space which could benefit users, it lacks the exclusive content and telematics abilities which Sirius XM could bring to the table. Furthermore, with Google pouring money and expertise into the development of self driving vehicles, the company obviously sees the vast potential size and broad scope of a revolutionary change in the way that people use cars. Bringing a huge array of embedded in-car entertainment and connectivity options would be the natural progression, and Sirius XM would be the natural provider of choice.

With Apple also looming as a competitor poised to increase its offering within this industry, Sirius XM and Google would be smart to join forces. In an ideal world I would suggest that Google might be interested in taking over Sirius XM in order to fully exploit the potential of the company. The potential for Google to enter the satellite radio space has been proposed before. However, John Malone's Liberty Media already controls Sirius XM and it would be very unlikely for them to relinquish power just as they are making moves to increase profitability and ramp up subscriber additions. A partnership between Google and Sirius XM would be the best case scenario and would ensure not only Sirius XM's future dominance as a satellite media broadcasting leader, but it would also solidify Google as the industry standard for connected vehicle technology.

Disclosure: I am long SIRI, . 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.