In Part II I discussed some of the issues surrounding Pandora's (NYSE:P) mostly advertising-based revenue, and a problem Pandora faces with regards to mobile data infrastructure just not being there yet for users to switch to internet radio in the car.
Here I will discuss the pitfalls of the low cost of entry for competition, and the contrast with SiriusXM (NASDAQ:SIRI), which has a prohibitively high cost.
Pandora's claim to fame is the "music genome project" -- software on Pandora's end that attempts to create personalized radio stations based on an algorithm and database of user preferences, in order to tailor music to your liking. This, and only this, is what sets Pandora apart from other competitors, like Spotify, I Heart Radio, terrestrial radio, and even for the time being, SiriusXM.
The problem with this, in my mind, is not enough of a hook to keep users loyal to Pandora. Pandora has the head start, the biggest user base, but that is not enough in the world of "free" and the fickle audience that can and will easily move to the next free thing that comes along. Because Pandora does not control its infrastructure and delivery mechanism, or their content, they are, in essence, a piece of software.
SiriusXM, on the other hand, not only has licensing that gives it exclusivity to content which you can't get anywhere else, but it also controls its own infrastructure and delivery. SiriusXM is a total system with massive barriers to entry that make it an island, with a fortress on it, inside a box inside a box inside a box inside a vault with a 10-million-digit combination, guarded by hellhounds. To put it more simply, their turf can't be messed with directly, without some major backing. I don't see it happening.
Since Pandora is merely software with a bunch of non-paying users, there is almost no cost to entry for those who already have the content behind them, to compete, and possibly crush Pandora in a virtual heartbeat. I believe SiriusXM is in the prime position to do this. While it has been suggested time and again that SiriusXM should consider a synergy with or acquisition of Pandora, I do not think this would be in SiriusXM's best interest. SiriusXM has already stated they are developing an internet-based offering which will compete, and offer personalized radio stations, later this year. With access to SiriusXM's broad content base, as well as availability of Satellite delivery, coupled with their internet offering, SiriusXM has the best prospects moving forward in this space, for far less cost than an acquisition or partnership.
For now, there is room for them to coexist, but I do not think that will last forever. Time will tell, and there is room for reassessment as the future becomes clearer.
Right now, I am bullish on SiriusXM, and bearish on Pandora, and have invested accordingly.
Disclosure: I am long SIRI and SIRI March $2 calls. I may enter or exit a position in P put options at any time.