Does Sirius XM Have Its Head In The Clouds?

Jun.14.12 | About: Sirius XM (SIRI)

We have all heard of cloud based services. The concept is actually pretty simple. Consumers store files, music, photos, and more on a virtual hard drive in a virtual cloud that allows them to access it at any time from any location. The "cloud" has been around for quite some time, but it has not been until the last couple of years that the concept has taken a deeper meaning to consumers.

In the audio entertainment landscape there are popular clouds for Apple, Google, Amazon, and a few others. Again though, the concept is not really a new one. Music services like Spotify and Mog allow users to access any song they wish at any time they wish. Essentially these are clouds in some form as well.

Sirius XM (SIRI) has been developing and rolling out its Satellite Radio 2.0 product for quite some time now. Part of Satellite Radio 2.0 deals with the satellite service the company offers, while an entirely new part of it works on the Internet and will utilize Sirius XM Internet Radio.

When Sirius XM speaks of features such as "personalized radio" and "On-Demand" consumers and investors should understand that these services are geared toward the I.P. or Internet delivered service. The reason these services are not part of the satellite delivered service is that the satellite delivered service is a one way service. Sirius XM radios in your car do not communicate to the satellites.

Sirius XM will be able to do "personalization" and "on-demand" functions over the net and via devices such as computers, smartphones, tablets, and Internet connected cars. Thus, when the company rolls out these products later this year, there will be a cloud of sorts in existence. While initially this cloud will serve non-music content, it could in theory grow and develop into something much more. In fact, it could generate an entirely new revenue stream for the company.

Currently Sirius XM does not have direct deals with record labels. For those thinking that Sirius XM's "personalized" or "On-Demand" services will allow you to type in any song at any time to listen to, get that thought out of your head. As of right now that is not in the cards. Rater, these services will start out with sports, news, and Sirius XM talk content for which they have the rights to offer such capabilities. Thus, you may be able to get Jay Thomas shows on demand, but not Sean Hannity (examples).

This is a good beginning. Consumers will get access to some great talk content, and it is even possible that Sirius XM could get a small fee for some "On-Demand" content. Further, they can insert advertising in this content that can help generate more revenue.

Now let's assume for a moment that Sirius XM is able to work out deals with record labels and can take personalization and "on-Demand" to the next level. This is where things could get potentially interesting. Perhaps the company offers up a cloud storage service of its own. Consumers might get a 5GB free, and then pay a fee for higher storage levels. What if you are listening to a song and want to buy it? Currently Sirius XM essentially refers you over to a company like iTunes. What if you were able to simply hit the "love" button on your screen, buy that song from Sirius XM, and store it in your Sirius XM cloud? There are many exciting possibilities that exist here.

Now, before Sirius XM jumps into the cloud storage and music sales business, there would be a lot of things to consider. These types of ventures take resources and cost money to operate. Is the possible profit margin such that it adds incremental vale to the company? Does it make subscribers more "sticky"? Will Sirius XM customer see this as a must have service? Will having such a service keep consumers from using other competing products?

As yet Sirius XM does not have its head in the clouds, but at a minimum should be exploring the viability of taking its brand in that direction. Investors should be thinking along these lines as well. The point of investing into a company like Sirius XM is to capture growth. Sirius XM still has room to grow, and a cloud concept may be a very viable avenue to explore.

Disclosure: I am long SIRI.