Pandora Takes Huge Bite Out Of Sirius

| About: Sirius XM (SIRI)

If you've paid attention to recent Ford (NYSE:F) TV commercials you might have noticed something that could be a serious threat to Sirius XM's (NASDAQ:SIRI) market share. Some of those ads show drivers in new Ford cars downloading tunes from Pandora (NYSE:P) as they drive.

These ads indicate that Pandora is trying to go after drivers in a big way. It already reaches large numbers of them through its apps for smart phones and other mobile devices. A lot of drivers use these because they can access Pandora for free over them, while they would have to pay for Sirius.

As the Ford ads demonstrate, Pandora has already had some success getting its app into cars. Since most vehicles these days have computers built into the dashboard, it shouldn't be hard to add a simple app like Pandora.

That means that Pandora is a huge threat to Sirius's car radio business. If Pandora could succeed in getting just a share of that, it could seriously undermine Sirius's long-term profits. Drive-time listening and entertainment has been the backbone of Sirius's business.

Sirius does have one huge advantage over Pandora in this arena, it offers a lot more than just music. Not everybody likes to listen to music and many music fans occasionally listen to something else. Sirius's dominance in sports in particular should help preserve its market share.

Mobile advertising revenues to surge, likely helping Pandora and Sirius

The Street recently noted that Pandora has some huge potential problems that could sink its stock value. The problems are costs and a lack of cash flow for the costs it faces in maintaining its technological lead. The company needs to develop cash flow in the form of advertising and revenue - and quickly - if it wants to survive.

Pandora might be able to do this because of the huge growth in mobile ad revenue currently underway. The eMarketer Digital Intelligence analysis agency predicts that spending on advertisements designed for mobile devices in the US will reach $10.83 billion by 2016. US advertisers spent $1.45 billion on mobile ads in 2011 - which was an 89% increase over the spending for 2010. The advertisers bought $769.6 million in ads in that year.

Pandora seems well placed to capture at least some of that revenue because vast numbers of people listen to music over mobile devices. The Street noted that Pandora has the ability to sell both visual and audio advertising because users interact with it via an interface they have to look at. So Pandora has a captive audience for advertising. This would seem to be a bigger threat to newspapers, magazines and other paper media than to other radio companies.

If Pandora can successfully take advantage of this new stream of revenue, its stock value will shoot up. To achieve such values Pandora will have to demonstrate that it can actually generate advertising revenues. To do that, it'll have to show that it can actually attract advertisers and help them move their products.

It goes without saying that Sirius, which has an App of its own and large amounts of radio programming found nowhere else, could get a huge share of that advertising revenue as well. Sirius could potentially make vast amounts of revenue by selling advertisements on the sports events it broadcasts. These include NASCAR stock car racing and Premiere League Soccer - which are two of the most profitable sporting venues in the world.

Another company that could benefit from this is Clear Channel Communications (CCMO), which makes its terrestrial radio available online through iHeartRadio. Clear Channel has a lot of talk programming not available elsewhere and a lot of experience selling advertising.

The biggest competitor all of these companies face in the mobile device advertising arena is Google (NASDAQ:GOOG). The eMarketer's analysts estimated that Google earned 51.7% of all mobile advertising revenues. Since an estimated 59% of all smartphones in the world use Google's Android operating system, Google has an edge here that will be hard to overcome.

Liberty makes new push for Sirius Control

Colorado billionaire John Malone and Sirius CEO Mel Karmazin are heading for another showdown at the Federal Communications Commission (FCC). Malone's company Liberty Media (NASDAQ:LMCA) filed a petition at the FCC on May 31 that would let it take control of a majority of seats on Sirius's board.

Presumably, the first thing that Malone's team would do at Sirius would be to fire Karmazin. Since Karmazin's weird behavior has hurt Sirius's stock value, so his termination could send Sirius's shares up in value. Reuters noted that Liberty didn't inform Karmazin of its latest move. Although Sirius was able to file a response to Liberty's latest move on the afternoon of the 31st.

That brief contained the intriguing revelation that Sirius and Liberty are in negotiations about transactions. That could mean that Karmazin thinks he can't stop Malone from taking control, so he is negotiating an exit from Sirius. That way he could avoid the embarrassing situation of being thrown out of the company he built.

A Karmazin departure could be very bad for Sirius stockholders because Karmazin would presumably sell off all the Sirius stock options that he has. Karmazin reportedly has at least 32 million shares of Sirius that he could sell off. He already sold 17 million of them in May and made around $33 million from the sale.

If Karmazin dumps the rest of his Sirius stock, he'll send share prices down perhaps to under $1 a share. That of course could be exactly what Malone wants because it would enable him to buy up Sirius on the cheap. So the fight between Malone and Karmazin could be the boardroom equivalent of a pro wrestling match. It's being staged to make both contenders look like bad asses without doing any real harm to either.

If that wasn't bad enough Liberty plans to convert half of its preferred shares in Sirius to common stock according to Reuters. Malone's company also plans to hold a share of 32% in Sirius that seems to indicate that it plans to dump those shares right back on the market. That would drive Sirius's stock prices down even further.

The reason Malone could undertake such a strategy would be taxes. If he could engineer his takeover of Sirius in such a way as to lose money, Liberty could write the losses off on its tax return. That would be very good for John Malone and Liberty stockholders, but bad for Sirius share values. Malone has a history of using such complicated strategies to get control of companies he wants. He used similar maneuvers at Direct TV in 2009.

Weak Economy makes Sirius's future revenue questionable

Sirius stock should actually be going up in value right now because auto sales are booming. The AP reported that US vehicle sales increased by an astonishing 26% in May in spite of all the terrible economic news. One of the biggest beneficiaries of the sales boost was Chrysler, which saw its sales increased by 30%. Chrysler installs Sirius in all of its new cars. Another big winner was Volkswagen (OTCPK:VLKAY), which saw its US sales increase by 30% in the month. Since many of those vehicles contain Sirius XM units, that should be good news for Sirius.

Unfortunately, the long-term situation for the company looks cloudy because of the dismal economy. Business Week reported that much of the demand for new cars is driven by easier to get auto financing. That indicates that a lot of those new car buyers don't have much cash for things like Sirius satellite radio subscriptions. So these increased auto sales may not translate into a lot of new Sirius subscribers. It could help Pandora - which is free to listeners.

An even bigger threat to Sirius is the employment situation. Statistics from the US Bureau of Labor Statistics indicate that the US economy added fewer jobs than expected in May. Economists had expected 77,000 to 115,000 new positions to be created in the month. To make matters worse the S&P 500 fell by 275 when investors heard the news.

This would indicate the economy is headed down again - which will scare consumers and cause them to start belt tightening. Many of them will start eliminating luxuries like satellite radio subscriptions. That will definitely hurt Sirius's bottom line and profits.

This contraction means that the Sirius stock probably won't be going up anytime soon. Instead, Sirius seems doomed to fall to new lows as the economy sinks.

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