Why the Pandora IPO Is Irrelevant to Sirius XM

Includes: P, SIRI
by: King of All Trades

By Relmor Demitrius

A lot of press has been issued of late about the upcoming Pandora (NYSE:P) IPO. The Internet random music generator company, which gives about half of every penny in revenue directly to royalty charges, is planning on selling shares in the company on Wednesday. It's offering 14.7 million shares at around $10-12 a share. This would generate around $147 million.

As per filings when the offering was announced, part of the money will be to simply repay venture capitalists and another portion expenses. The balance will be held for general corporate purposes. Only around 20% of the company’s equity is being offered here as well. For a company that has never made solid profits, there seem to be a lot of buyers offering cash to invest. Is this money that could have been directed at Sirius XM Radio (NASDAQ:SIRI)? Is Pandora even competition for Sirius? I believe the answer to both those questions is no.

Institutional ownership in Sirius was shown in Q1 to be about 38%, up from 20% just a little over a year ago. With the average price in that time being around $1.50 a share, that is an influx of 700 million shares versus what was sold. That comes to over $1 billion in new money in around one year’s time. Pandora’s IPO seeks to generate $147 million total revenue. Some of that value is instantly gone as it is simply paid to venture capitalists, as previously mentioned. So as you can see, based on this, Pandora’s IPO wouldn’t be deflecting significant funds away.

Looking at total daily volume on Sirius right now, as a three-month average, it's coming in at 80 million shares a day. With an average price lately of about $2 a share, that is $180 million a day being traded in Sirius. That's more than the total value of the offering entirely from Pandora. But we're talking apples and oranges here. One company could buy the other with one quarter of free cash flow, while the other is struggling to make money in a free and advertising business model. Let's compare this in other ways.

Mel Karmazin, CEO of Sirius, likes to show slides of how Sirius compares to its competitors in the same space. I always felt this was a tongue-in-cheek use of the word “competitor,” as these numbers clearly show the only real competitors Sirius has is terrestrial radio. Total radio revenue in the sector is $18.8 billion. Sirius has 15% of that; all Internet radio companies have 5% of it; and terrestrial radio has 80% of it, when it was almost 100% in 2001.

Of subscription radio companies, Sirius receives $2.8 billion of the $3.1 billion total. The other $0.3 billion is all Internet radio companies combined, not just Pandora. That includes Slacker, I heart Radio, Rhapsody, etc.

The actual number of subscribers that use all forms of radio subscriptions comes in at 20.6 million for Sirius, less than 1 million for Spotify, 750,000 for Rhapsody and less than 500,000 for Pandora.

Sirius receives $141 a year per subscriber, Pandora receives $1.68 per user, and Clear Channel receives $13.61 per listener. Sirius' monthly average intake per subscriber is $14.50.

One can argue that Sirius has huge operating costs. Correct. But they are static for the most part. Other than fluctuations in OEM acquisition costs based on how many cars were sold in that quarter, Sirius’ cost side is very predictable from here until 2017 when it will begin spending money again on new satellites. It also has many unexplored avenues to cut costs that have yet to play out. With predictable costs, profit margins can be easily estimated. Although a high share count prevents Sirius right now from having attractive earnings per share, its free cash flow and EBITDA guidance one year out is exceptional for the sector. Its EBITDA will be around $850 million by the end of 2011. Pandora’s total revenue for the year was $137 million. Once again, this is apples and oranges.

Pandora would have a hard time creating a significantly better product as well. With Clear Channel having major debt concerns, Sirius could also be poised to steal a lot of talent on the cheap in the coming months. Even Rush Limbaugh has been rumored to be jumping the sinking ship of Clear Channel. It is easy for Sirius to add channels.

Other things that separate Pandora from Sirius are that Sirius is a content-driven service, with data services that cannot be offered in the Pandora model. The ability to give live interaction, requests, weather, sports, talk radio, live broadcasts of CNN, CNBC, and countless other stations really gives little to compare with. One service generates random songs and the other is actual radio. Radio has always been a two-way communications medium. Data charges are also a huge negative to the model, as it relies 100% on Internet and mobile devices are a huge driving force in its usage.

Another point is Sirius is basically a monopoly, whereas Pandora has many competitors with similar services on the same medium.

All that being said, I'm sure Pandora is a nice product that many people enjoy. I am not writing this to bash Pandora and talk about its shortcomings, of which it has many. I for one do not like it at all. This article is in response to the talk that this IPO is affecting the trading of Sirius. Sirius lists Pandora as a competitor, but it also lists MP3 players and iPods (NASDAQ:AAPL). It's thorough; when Karmazin says he sees no acquisitions that make sense for Sirius, you can be sure he knows what Pandora is when he says that.

Disclosure: Long SIRI