Spotify Knocking On The Doors Of Pandora And Sirius XM

| About: Pandora Media (P)

It seems that Spotify, the late-comer to the North American music market, is making much bigger waves than many anticipated. Services like Pandora (NYSE:P) and Sirius XM (NASDAQ:SIRI) need to pay attention to this fast mover, because if they don't, Spotify could continue the march toward its goal of being the "Go-To" music service.

No, global music dominance is not happening next week, month, or year, but the stage is being set for a battle that may happen sooner than many think. The biggest threat right now is for Pandora.

Pandora is a wonderful service with a massive following. The music scene for Pandora exploded with the advent of the smart phone. The company has been genius in getting itself out there to the masses, and the listener metrics are improving with each passing day. The problem is that the royalty expenses for Pandora are huge and the company has had trouble finding a way to take its advertising-supported model to the next level.

Spotify on the other hand, has built its business on a subscription model that is gaining traction. Now that the subscription model is established, the company is going for a free advertising supported service that will rival Pandora. What does this mean? It means that Pandora will now find themselves in a fight for advertising dollars that as yet have not been enough to support the business. Not only that, but with Spotify adding a new supply chain the market has just been flooded with ad space inventory. The laws of supply and demand kick in now in a major way. There are only so many advertisers out there, and now they have additional choices, crimping the ability of Pandora to command premium dollars.

Spotify is moving at a turbo pace, and this now brings up Sirius XM. For years Sirius XM has not been seen as an innovator. Satellite radio was slow to respond to the iPod, even slower in dealing with the smart phone arena and mobile listening, and missed the Facebook Music phenomenon that helped launch Spotify to the next level. Spotify even landed a sweetheart deal with Coke (NYSE:KO), the world's leading cola manufacturer. The slow pace of Sirius XM is now costing the company, or at least beginning to.

Spotify has direct deals with record labels that allow them to do things Sirius XM and Pandora can't. Namely, true "On-Demand" for music. With Spotify now offering a free Pandora-like model in addition to true musical "On-Demand" they could begin to woo away consumers from services like Sirius XM and Pandora.

Sirius XM is not without its own weapons though. The satellite radio provider has a wide assortment of talk, sports and news programming not offered by Spotify or Pandora. Sirius XM boasts talents like Howard Stern, Oprah, Martha Stewart and every major sport out there. The company has even recently locked up some mobile rights to broadcast big time sports like Major League Baseball, a move that should not go unnoticed. It seems that as the audio entertainment landscape is getting more competitive now that Sirius XM is finally picking up the pace and securing important content deals that make them a differentiator.

At this point Spotify has not gone into the world of non-music programming. If they do, it could make for some interesting times ahead. Ever since the merger Sirius XM has been able to cut content costs. Much of this happened simply because there was no longer a bidding war between Sirius and XM as separate companies. Lately it seems that Sirius XM is working deals that they have been slow to work previously.

If you are invested in Pandora or Sirius XM and are not yet paying attention to the rest of the music landscape, you better do it soon. For years now I have been encouraging investors to explore the other offerings in the space if for nothing else to gain an understanding of these new competitive forces. Many passionate Sirius XM fans have been slow to the uptake simply because they thought that nothing out there could be better. As CEO Mel Karmazin spoke of more advertising on the competitions' platform, the reality has been that these companies typically offer more music per hour than does the satellite radio provider due to station bumpers, DJ chatter and snippets.

It is difficult to be all things to all people yet somehow, virtually out of nowhere, Spotify seems to be going down that path. Like I stated earlier, none of these companies will disappear overnight, or perhaps ever. However, if you have your hard earned money invested in them, you will want to know if that tremendous growth you were hoping for will be slowed down by the existence of additional consumer options.

Important items to watch:

  • The user growth of Spotify
  • How important Facebook integration is to the music scene
  • Deals like the one between Spotify and Coke. It signifies what big money is following
  • The user growth of Pandora
  • Pandora listener hours
  • Ad revenue for all of these companies
  • Locking up exclusive, or near exclusive content a la Sirius XM
  • The Sirius XM lawsuit with Sound Exchange
  • Royalty rates

Remember, all of these services have the potential for greatness. They can all also become simply good. There is a value difference between good and great.

Disclosure: I am long SIRI.

Additional disclosure: I have no position in Pandora and no relationship with Spotify.

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