Sirius XM Is Too Old School To Buy Pandora, But Apple Isn't

| About: Pandora Media (P)

My Seeking Alpha colleague Robert Weinstein wrote a solid article speculating that Google (NASDAQ:GOOG) or Sirius XM (NASDAQ:SIRI) could end up buying Pandora (NYSE:P). While Weinstein made a good case for both companies making the acquisition, particularly Google, I offer two other candidates.

First, for the most unrealistic one: The record labels. Right now, Pandora's biggest problem is the amount of money it must pay in royalties, which it includes as part of content acquisition costs. As the company's most recent 10-Q shows, these costs continue to increase exponentially as Pandora grows:

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There's little question that Pandora can sell mounds of multi-platform ad space, even with the formidable challenge it faces from a now well-organized and aggressive Clear Channel (CCMO.PK) and its combo of iHeart Radio and powerful terrestrial stations.

As it stands, Pandora runs in a bit of a rat race because the better it performs, the more it has to dish out for content. On the positive side, the company does not have to deal with Netflix (NASDAQ:NFLX)-like problems. Pandora's content costs are predictable, as they are legally set and mandated, while Netflix faces variable expenses that are impacted by competition and the whims of movie studios and other programmers.

On the plus side, the record companies need Pandora. Come 2015 when a new royalty deal gets put in place, Pandora should receive a more sensible arrangement, assuming it continues to grow listener hours and remains a market force in terms of sales and brand awareness. Simply put, music discovery and its pioneer, Pandora, are good for record labels. It drives what's left of record sales and helps put butts in seats at concerts.

To that end, it would make sense for the record companies to come together and buy Pandora. I view this in a similar vein to the notion that movie studios and television programmers should hang on to Hulu, as opposed to selling it off to a third-part content provider.

Obviously, a multitude of legal, regulatory, anti-competitive and logistical hurdles exist to this relative long shot of an idea. Irrespective of that, like movie studios and television programmers, the record companies represent the old guard. And the old guard has never really been too keen on taking control of delivery of their content. It's the year 2011, they should be there by now, but selling Hulu and using outdated royalty schemes are just two illustrations that neither old guard representative is even close to figuring out how to deliver and better monetize their content.

Along similar lines, Sirius XM remains too old school to take the leap and buy Pandora. As I have noted in recent Seeking Alpha articles, the company operates more like a slow-growth old guard terrestrial radio company than one that runs in the Internet/tech/new media space against innovators such as Pandora and Apple (NASDAQ:AAPL). While some would say Sirius XM is too smart to buy Pandora, such a move would turn me into a long. Alas, it's not going to happen. Such foresight and a penchant for innovative aggression does not exist on the 36th Floor of 1221 Avenue Of The Americas.

In Curpertino, however, the so-called Tim Cook era could hold an acquisition or two for Apple. And Pandora makes perfect sense. If you were a cool hunter about 5-10 years ago, you would have run as fast as possible to your bosses holding an iPhone, iPad or Macbook Air streaming Pandora Radio. Not only would Apple have the audio entertainment market cornered on cool, but it could perfectly integrate Pandora into iTunes and revive the failed social experiment known as Ping.

Using a high estimate, Apple might pay a couple billion dollars for Pandora. That's pocket change when you consider the possibilities inherent in marketing Pandora via Apple's dominant devices and socially-favorable retail stores across the globe. Pandora could go global faster - and potentially work an easier-to-swallow royalty deal come 2015 - with Apple's muscle and war chest behind it.

Because I hedged my recent long position in Pandora by selling calls and having stops in place, I did not take a hit as the stock suffered at the hands of Clear Channel's iHeart Beta release. Pandora could find support in the $9 range. If it does, I might make another long play.

With all of the players vying for the listener's ear in traditional and not-so-traditional radio, I've got to think M&A activity ticks up. Given its sound plans for selling advertising, market penetration, brand awareness and massive room for growth, I have to think Pandora makes an attractive target.

If Pandora is smart, it will shop itself around. Clear Channel has an edge on Pandora because of its platform, which comes in the form of hundreds of terrestrial stations. If Pandora can find a comparatively as powerful platform - through an Apple or Google or, to a much lesser extent, the niche that is Sirius XM (but let's not forget that Liberty Media (LCAPA) owns an interest in SIRI) - it automatically levels that portion of the playing field against the resurgent and impressive Clear Channel.

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