Rumors about Sirius XM (NASDAQ:SIRI) being a "good match" for (fill in the blank)... has been around for several years. The reality of any possible acquisition became a bit more complicated once Liberty Media (NASDAQ:LMCA) entered the mix with partial ownership. But with Liberty having recently gained majority control of Sirius with a 53% stake, this has not stopped matchmakers from wondering about Sirius's growth capabilities if the company were to, say, get in the "right hands."
But that's where things get complicated. And recently, discussions have surrounded a possible deal with Apple (NASDAQ:AAPL) and even Microsoft (NASDAQ:MSFT). Before we dive in deeper, I will say that both deals present some synergistic possibilities for both would-be parties involved. But that doesn't mean a deal makes sense, or even that it should be considered by either company.
This time around, what has spawned the speculation for a Sirius deal is the free-fall seen in Pandora (NYSE:P) stock following yet another earnings disappointment. The notion is that Sirius, which recently grew subscribers to 25.8 million, has potentially longer staying power. This is even amid Apple's entry into the dashboard with CarPlay, which supports other platforms such as Spotify, Beats Radio and iHeartRadio. Not to mention, Apple has begun to gain traction with its iTunes Radio streaming service.
Some are making the argument that Apple should capitalize on Sirius's 20 million self-pay subscribers and rising free cash flow, which is seen as an attractive criteria. This is one where Apple can leverage that user-base to monetize both CarPlay and iTunes Radio, which (according to some) doesn't compete with Sirius as much as it does with Pandora and Spotify.
There are other strong factors working in Sirius's favor. Not the least of which is that Sirius' just achieved an all-time high car penetration rate of 71%, helped (in part) by agreements with Nissan, Honda and Toyota. Of that 71%, there are a reported 50 million cars on the road today with satellite equipped radios already in the dashboard. That number is projected to grow to 100 million over the next couple of years on the assumption that auto sales remain at 15 million per year. But will it?
From that standpoint, adding Sirius's strong content would immediately position Apple as the most dominant name within the dashboard, given that Apple already has deals with 12 auto manufacturers. Sirius is being compared to the cable companies of the 1970s and is considered just now "building its footprint" in the automobile. Sirius bulls make the argument that Sirius's growth has only just begun. But I don't think the current state of the cable industry, where Time Warner Cable (TWC) and Comcast (NASDAQ:CMCSA) are being squeezed by Netflix (NASDAQ:NFLX) supports a bullish argument for Apple making this deal.
But although Sirius's strong presence in the dashboard would make sense to Apple, the tech giant wouldn't need Sirius to kill off Pandora and Spotify. They are already doing that to themselves. Even Beats Music, which recently launched its own streaming service is struggling to duplicate the popularity it achieved with its headphones. If not Apple, how about Microsoft, which has (in the past) worked with Sirius?
Some investors would be surprised to know that Microsoft and Sirius once collaborated on a video service. In 2005, at the Consumer Electronics Show in Las Vegas, Sirius selected Window Media Video 9 (WMV9) to promote its movie video platform. The two companies also struck an agreement to develop other video applications. Recall, this was when Sirius began its push for backseat video service, which was designed primarily for children.
Here's an interesting nugget; back in 2005, Sirius's President of Operations and Sales, who was the primary liaison to the WMV9 project was none other than Jim Meyer, Sirius's current CEO. At the time, Meyer said:
"Working with Microsoft to utilize the compression efficiencies inherent to WMV9 will enable SIRIUS to deliver content optimized for satellite broadcasts and reception."
So, given Meyer's presumed relationship with Microsoft, the software giant may likely be a more realistic suitor than Apple. Don't forget, Microsoft, which already has in-car systems in Ford (NYSE:F) vehicles, also has ambitions in the automobile dashboard.
As it stands, there are arguments for why both Apple and Microsoft might be interested in Sirius. But none of these reasons are enough to suggest that they will or even should. Both companies have the cash - that's not even close to being an issue. Given that both companies already have access to the vehicle, it's not as if either company needs Sirius to strike their own deals with manufacturers.
The other thing is; neither company particularly care about the satellite delivery model, which is one-way communication. Both companies would be taking a significant step backwards. Again, this goes back to the comparison with cable companies. People are cutting cable cords in favor of IP/cell-based content. From that standpoint, Sirius's satellite doesn't appear sexy. Not to mention, expensive to maintain/replace based on their life cycle.
There are other factors that would stand in the way of a deal getting done. I've sent emails to Sirius's management placing inquiries hoping to get some clarity regarding global/overseas music license agreements. But from my basic understanding, the current agreement would not allow music transmission outside of the U.S. That alone makes Sirius unappealing to a company like Apple, which is a global brand.
For Microsoft, that's a different story, only because Microsoft is working behind both Apple and Google (NASDAQ:GOOG) (NASDAQ:GOOGL). The company is more desperate to make a deal. And Microsoft's new chief seems more willing to think outside of the box. But this goes back to Liberty's involvement. While a Microsoft acquisition would be good for shareholders, Liberty may continue to hold Sirius hostage.
Disclosure: I am long AAPL.
Business relationship disclosure: The article has been written by Wall Street Playbook's tech sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.