Apple Could Become Serious Competition for Sirius XM

Includes: AAPL, IHRT, SIRI
by: SA Editor Rocco Pendola

Arbitron (NYSE:ARB) and Edison Research released a report on Tuesday that bodes well for the future of internet radio and smartphone access to media, but offers mixed results for Sirius XM (NASDAQ:SIRI).

The study used a random sample of 2,020 respondents, 12 years of age and older, culled via random digit dialing and from Arbitron Fall 2010 diary keepers. Telephone interviews, which included both landlines and mobile phones, and diary keepers represented 54 and 46 percent of the sample, respectively. Researchers conducted 480 of the interviews with cell phone respondents, according to the Edison website.

To almost nobody's surprise, the study found that smartphone ownership tripled over the last two years. That's just the beginning of the bad news for Sirius XM if you buy into the notion that internet radio and streaming from a smartphone could hurt the satellite radio provider's position.

  • Weekly use of all types of online radio (FM/AM radio station streams or online-exclusive) has doubled in the last five years.
  • Fifty-six percent of respondents reported listening to online radio at some point in their lives.
  • Thirty-four percent reported listening to online radio in the last month. Generalizing the sample to the larger population (which is possible given the sample's structure), that 34 percent represents about 89 million Americans.
  • The weekly internet radio audience has doubled every five years since 2001, from 5 percent in 2001 to 22 percent, or about 57 million Americans, in 2011.
  • Respondents self-report having spent 9 hours, 47 minutes, on average, with online radio each week.
  • One in ten Americans reported listening to Pandora in the week prior to taking the survey, which was conducted throughout January 2011 and the first few days of February 2011. Sixteen percent have listened in the last month and almost 25 percent have listened at some point in their lives.
  • More than one in ten cell phone users have streamed online radio through their vehicle's stereo.
  • The percentage of people who have ever listened to online radio in thier car by connecting a smartphone to their stereo system has grown from 6 percent in 2010 to 11 percent in 2011.
  • Nearly one-third of Americans have connected an MP3 player to their car stereo.

At the same time, Sirius XM could stand to benefit from an increase in smartphone ownership and use. For instance, the company does use the smartphone to its advantage with an iPhone app that allows users to stream Howard Stern's programming as well as another 120+ Sirius XM stations. In terms of online radio, Sirius XM offers an internet stream (which I listen to for at least 12 hours a day and love) and most observers expect the company to head further in that direction with the anticipated release of SatRad 2.0. When asked about listening to online radio in the broad sense, the study did not isolate which service listeners accessed; therefore, it could have very well been Sirius XM or something else other than Pandora.

It seems that the survey results balance themselves out in relation to Sirius XM and smartphone/internet radio comparisons. While impressive numbers of people listen to online radio in general, stream it in the car, or hook MP3 players up to a vehicle's sound system, it does not appear to be a daily habit, as of yet.

Just 5 percent of smartphone users and 3 percent of cell phone users report listening to the streams of FM or AM radio stations "several times per day or more." Eight percent of smartphone users and 3 percent of cell phones users stream Pandora with the same frequency. And 19 percent of smartphone users and 9 percent of cell phone users listen to music they downloaded or transferred to their mobile device multiple times per day. By contrast, it would make sense that, like terrestrial radio, Sirius XM would be a daily habit for users, given its exclusive content and omnipresence in cars, for both terrestrial and satellite, as well as homes and offices, particularly for terrestrial. The study did not measure this; it's simply my assumption.

Some results from the Arbitron/Edison study prove potentially favorable to companies beyond Pandora. For example, Sirius XM and efforts such as Clear Channel's (CCMO.PK) iHeart Radio could benefit by taking a cue from what users like about Pandora and leveraging it with their own exclusive content.

  • Seventy-seven percent of Pandora users "strongly agree" that the ability to create personalized radio stations represents a reason they use the service.
  • Seventy-four percent of Pandora users report the same sentiment towards being able to skip songs.

Clear Channel is on record as stating it will include these or similar features with its smartphone service. It already does online via iHeart. And most expect these and other types of personalization features to accompany Sirius XM's SatRad 2.0. In addition, Sirius XM does not run commercials on most of its stations and it generally plays a wider variety of music than terrestrial radio stations. Survey respondents reported that both of these factors strongly contribute to their decisions to use Pandora.

Based on the strong positive sentiment many SIRI longs have in relation to their ownership of the stock and use of the company's services, it also comes as no surprise that satellite radio users score high on measures of "likeability" and "passion." Pandora users do as well.

  • Three-quarters of survey respondents report liking or loving both satellite radio and Pandora.
  • Thirty-nine percent of satellite radio users and 32 percent of Pandora users report loving the service.
  • Arbitron and Edison devised a measure for the percentage of "passionate users" by multiplying the percentage of people who use a given platform or service by the percent who "love" it. Pandora topped satellite radio in that category by a count of 8 to 5 percent. These results suggest that while core users speak positively about their experiences, both Pandora and Sirius XM, which represents the satellite radio category by default, might both remain in relatively early adoption phases.

When it comes to likeability and passion, however, Apple (NASDAQ:AAPL) wins by a wide margin, reinforcing the belief that the company's products serve as direct competition to not only Sirius XM, but internet radio and other types of offerings. The iPhone, iPod, and iPad took the top three spots in the "like" or "love" category with 85, 84, and 83 percent of respondents noting that they "like" or "love" these devices, respectively. Parsing out just the "love" responses, Apple's iPhone took the top spot at 66 percent, the iPad came in second at 53 percent, and the iPod was fifth at 46 percent.

In terms of the percent of "passionate users," iPod ranked sixth at 14 percent behind "Broadband Internet" (32%), the "Cell phone" (27%), "Television" (26%), "Local AM/FM radio" (20%), and the "Digital Video Recorder" (17%). iPhone and iPad ranked in the second half of the possible choices at 6 and 2 percent, respectively. Remember, because number of users enters into the equation, newer and more expensive products tend not to fare quite as well as free offerings and ones that have been around longer.

Combine this information with the finding that it's not uncommon for people to connect mobile devices and MP3 players to their car stereos and it becomes clear that Sirius XM, Pandora, Clear Channel, and others should consider Apple (AAPL) serious competition for in-car listeners. Additionally, almost half of the population now owns an iPad, iPhone, iPod or other MP3 player compared to just 14 percent in 2005. And if given the choice between television and an iPhone, 58 percent would eliminate television to keep their iPhone. The same percentage would give up the television in favor of their non-iPhone smartphone.

Investors should take these studies for what they are worth -- a snapshot in time of how people consume, view, and react to media services and platforms. There's no doubt that Sirius XM, Pandora, Clear Channel, Apple, and other media/entertainment company executives pay attention to these trends through these types of studies and their own in-house and contracted research efforts. While I prefer the long-term prospects of internet radio and smartphone streaming over those of Sirius XM, how satellite radio company reacts to user tastes, likes, and dislikes could change my opinion. Further enhancements to Sirius XM's web-based offering or a SatRad 2.0 that lives up to its hype could provide such impetus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.