Yesterday I was doing some research into NHL contracts-related arbitration from over a decade ago and naturally I needed something to listen to. However, the laptop that I have iTunes loaded on with roughly 8,000 songs is currently afflicted with a bug and my iPod player was in another room. My only alternatives were to explore the music offered through Verizon (VZ) FIOS or meander over to Pandora (P). I chose the latter and much to my surprise (probably more like frustration, I’m not a huge fan of change) the site had gotten a face lift.
Pandora’s new interface seems cleaned up. The album artwork is much larger and the like, dislike, pause, and skip buttons are centered high on the page and more prominent than before. The advertisements on the right that I have never clicked also appear to have doubled in size. I’m guessing this in an attempt to get more inadvertent clicks.
I currently have 11 different Pandora "stations," each very specific and fine-tuned, but unfortunately this yields an extremely repetitive catalogue. This is my biggest peeve with Pandora. For a company that boasts itself as the ‘music genome project,’ their selection is rather limited. Their program also does not remember songs you listened to after you have left their page so if you listen to a given station each day it’s going to be the same songs over and over.
Another issue with Pandora is their inability to turn visitors into paying subscribers. The benefits of doing such are minimal, fundamentally you just do not have to listen to an audio advertisement every 3-4 songs. That’s why this company is having trouble producing any earnings. They claim that such a large amount of their audience are using smart-phones to listen, but the app is free as well, so they are then in turn again relying solely on advertisement revenue. The best thesis one can draw from this is that the smart-phone revolution is still in its earliest stages. Smart phones’ share of all cell phone use is still around 25% so picking safe stocks like Apple (AAPL) is still prudent.
As you can see Pandora has had a lot of trouble price-wise out of the gate. As I am writing this they are priced at $9.74. This means that they have lost more than 50% of their value off of their high only a few months ago. All of this shows that this company has a lot of maturing to do, and better do so fast if they plan on surviving. Sirius (SIRI), on the other hand, has this all figured out. They offer premium content, including talk radio stations, and it's all through paid subscriptions. Most users would not go back to terrestrial radio after having listened to Sirius, and using Pandora is an automobile can be difficult, not to mention draining on one’s phone.
Sirius is taking a beating today too, but who isn’t. They are priced at $1.72 right now as they struggle to reclaim their hold on the $2 mark. Their next earnings release is on Halloween and with any luck it will prove their ability to maintain a positive EPS. Their chart shows their continued upwards trajectory with a few light hiccups on the way.
In getting to my final point, Sirius must learn from the failures of these other companies. There is not much they need to learn from Pandora’s situation, actually it's exactly the opposite, but they could certain benefit from watching over the Netflix (NFLX) situation. Netflix is currently priced at $128. This is after having grazed the $300 mark in July.
It’s no secret what happened. They announced that they will be jacking up their prices and when that date hit everything when south. It left the company scrambling to figure out how to handle the massive loss of subscriptions, which were much, much more than they had projected. They finally decided to announce that they will be splitting the company into streaming and mail-order. Their first order of business was acquiring the Twitter handle of their new mail-order segment, Qwikster, so investors know that their capital is going to good use.
What this should teach Sirius is that sudden announcements of substantial price increases should be made sparingly. Of course, Sirius has already learned this lesson with their price increases and subsequent anti-trust suits that followed.
As you can see above, anti-trust cases make up a pretty big chunk of litigation Sirius is currently facing. You probably remember that their merger with XM Radio contained a plethora of anti-trust provisions so they have a duty to abide as such. Sirius does not have a monopoly on the market when you take into account traditional radio, Pandora, and mp3 players. Additionally, though there are significant barriers to entry into the industry, they are not invincible. In sum, the recent actions of both Pandora and Netflix should be closely scrutinized by Sirius before 2.0 makes its official debut. It is a risky decision on Sirius’s part but has the potential to reap future profits.
Disclosure: I am long SIRI.