Pandora vs. Sirius XM: Synergies and Multiple Revenue Streams

Includes: P, SIRI
by: Rocco Pendola

In a recent article, I discussed the potential synergies that Liberty Media (LCAPA) could create and exploit through its anticipated buyout of Barnes & Noble (NYSE:BKS) and outlined how Sirius XM (NASDAQ:SIRI) could fit into that mix. I discussed how different companies put internal and external synergies into play.

Internal synergies happen within a company's business lines. For example, consider how (NASDAQ:AMZN) leverages Amazon Prime with its new Instant Video offering. Apple's (NASDAQ:AAPL) halo effect clearly ranks among the most powerful internal synergies. Companies create external synergies when they partner with or lever their businesses to an outside company's platform or platforms. This can be as "simple" as the seemingly ubiquitous Now Available on iTunes promo that permeates the web or as relatively complex as Tesla's (NASDAQ:TSLA) model of providing electric vehicle components to other automakers.

Usually, when a company synergizes -- internally and externally -- it counts multiple meaningful revenue streams. Going forward, I will look at a company's internal and external synergies as well as its revenue streams as part of my evaluation process of its stock. While a lack of synergy or a single revenue stream does not automatically rule out an investment, one or both serve as a strike against a company.

In another article, I used the revenue growth of four proven companies -- Apple,, Google (NASDAQ:GOOG), and Microsoft (NASDAQ:MSFT) -- with amazing synergy and multiple, prolific revenue streams as a barometer for what might happen with five relative newcomers. Here's how the five stack up on the synergy and revenue stream criteria:

Company Name (Ticker) Internal Synergy External Synergy Multiple Revenue Streams
Pandora (NYSE:P) No Limited Not yet
LinkedIn (LNKD) Yes Yes Yes
No Yes Yes
Zipcar (ZIP) No No No
Demand Media (DMD) Yes Yes Yes

Below I compare Pandora, an Internet radio company that has yet to go public, with one of its top competitors, Sirius XM.

Multiple Revenue Streams

At this stage of the game, I do not consider Pandora a company with meaningful multiple revenue streams. It generates revenues from two sources: Advertising and subscription services. As of Pandora's latest S-1 filing, advertising accounts for a vast majority of the company's revenue. While growing year-over-year, I don't consider the revenues Pandora derives from subscribers as meaningful.

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In its latest annual report, Sirius XM breaks down its revenue streams into four categories.

In many ways, Sirius XM's present revenue landscape is the inverse of Pandora's. Sirius XM generates the lion's share of its revenue from subscribers and lesser amounts through advertising and payments it receives via agreements with companies that use and sell its technology and equipment. For the most part, "other revenue" is insignificant, as Sirius XM does not keep the U.S. music royalty fees it collects from subscribers and includes in the "other revenue" category.

Advertising revenue and equipment revenue account for 2.3% and 2.5% of total revenues, respectively, for Sirius. These numbers are less than the 5.6% of total revenue that Pandora's subscription revenue accounts for. Therefore, at this time, like Pandora, I only count Sirius as having one meaningful revenue stream.

It's completely possible and even probable that Pandora can make its subscription revenue stream and Sirius can make its advertising revenue stream more prolific. In both cases, it's a balancing act.

Pandora must weigh the value it provides its free and pay subscribers against its ability to monetize their use of its service. For example, it could provide less to free subs, but run the risk of losing some in the process. In Sirius's case, the lack of commercial advertising, particularly on its music stations, is a major selling point of its service. If it further commercializes these channels, it runs the risk of alienating at least part of its base and lessening satellite radio's attractiveness to prospective subs. Ultimately, both need to ensure that advertising adds to, rather than dilutes, the user's experience.

Both companies can increase advertising revenue through creative means. As Pandora becomes better synced inside the automobile and as Sirius's SatRad 2.0 comes to fruition, non-traditional means of advertising will naturally open themselves up. This does not even include the growth inherent in each company's other mobile, digital, and yet-to-be-constructed new media models.


As I detailed in the article referenced above, Sirius has an incredible amount of potential in this area. I would go so far to say that the internal and external synergies that a Liberty Media/Barnes & Noble hookup would almost automatically create have the potential to lift Sirius several levels above where it is now.

At present, Sirius does not do a very good job of creating and exploiting internal or external synergies ... at least not ones that could drive subscriber growth, revenues, and -- maybe most importantly -- marketing and branding. For example, the company forms a weak bond between its core delivery model -- in-vehicle receivers -- and its Internet stream. Today, the Internet stream represents little more than a convenient add-on to your subscription. I think SatRad 2.0, and the enhanced functionality and interactivity it will surely bring, will change all of that.

Externally, I don't think Sirius's focus on creating synergy has been especially sharp. Its reliance on what ends up amounting to auto sales and the on-the-ground sales and marketing execution of individual auto dealerships appears to be the culprit here.

For better or worse, Sirius will always be somewhat levered to new and pre-owned car sales. It just needs to do a better job of making itself an automatic part of the process. Recent contracts show that the company is on the right track to better positioning itself in this regard.

And, of course, Sirius should take advantage of any other avenues that will decrease its reliance on auto sales and the local dealer's ability and inclination to sell its service to new and used car buyers. Again, SatRad 2.0 and the potential contained in a Liberty Media/Barnes & Noble deal could get things moving in this direction.

Pandora does a slightly better job synergizing, particularly on the inside. The way it structures its advertising solution -- along multiple platforms -- and makes it a potentially interactive experience for advertisers and listeners represents a form of synergy.

Though not quite as far along as Sirius, Pandora is making inroads toward becoming an increasingly more seamless part of the auto buying and driving experience. This might be where the heart of the battle between Pandora and Sirius lies -- which will do a better job of situating itself as not only a standard option, but an expected one like air conditioning and power windows? Which will position itself best from an external synergy standpoint with automakers? And which will best succeed in creating synergies that drive revenue that have nothing, or at least less, to do with the somewhat unpredictable world of vehicle sales?

Disclosure: I am long SIRI, TSLA.

Additional disclosure: I may initiate a position in Liberty Media, Barnes & Noble, Apple at any time.