A Really Long Comparison Of Pandora, Sirius And Apple

Includes: AAPL, P, SIRI
by: Brian Nichols

Over the last few months, I have read various articles in reference to the future of radio/broadcasting and the major companies involved. Most of the articles center around Sirius XM (NASDAQ:SIRI) and Pandora (NYSE:P) as investors argue over which company presents the best long term investment. I believe that both companies have the potential to grow and remain strong within the industry but operate in different ways. Investors in these two companies do not view the industry in this way. It seems that investors of Pandora believe Sirius is headed to bankruptcy and vice versa. I believe I have a different perspective, which is unbiased related to stock, of the industry which includes Apple (NASDAQ:AAPL) because I am a consumer who uses and loves Sirius, Pandora, and iTunes.

Each company's service appeals on different levels depending on consumer preferences. With each company I have found advantages and disadvantages compared to the competition.

Apple's iTunes is both transcendent and innovating as the service forced competitors to change with something the market had never seen before. Millions of other consumers were blown away by this platform and all that it had to offer. It offers everything the consumer could want because you can simply download your favorites and bypass everything else you do not want. My only issue with iTunes is its access, which can present a problem if you are driving down the road or in a situation where you cannot search for what you want. It is somewhat time-consuming as you must find, download, and upload onto your device to enjoy the service. This presents a disadvantage compared to the competition; however, iTunes has everything where Pandora and Sirius fail.

The chart above shows the various avenues of income for Apple since 2007. Near the top you will see iTunes, which accounts for a large portion of the company's total revenue. With more artists and new podcasts being added every day, the growth of this market remains strong. The service is number one for millions of consumers who prefer iTunes over any other music and entertainment venue.

Pandora is an innovating company that has used the internet to deliver personalized radio. The company is growing at an alarming rate by more than doubling in revenue and subscriptions during the second quarter year-over-year.

The chart above shows how fast the company is growing quarter-over-quarter. I am not surprised to see this kind of growth within the company because Pandora is a great product. Its technology has been constantly improving throughout the last eight years to where now Pandora offers the customer music that only he or she desires.

The company is not profitable, despite higher revenue, and I wonder if Pandora is at the height of its use. The chart above indicates quarterly growth and I believe that Pandora still has, at least, a few good quarters left but I wonder about long term usage. The company earns the majority of its revenue from advertising, which is sustainable, $58.3 million of the company's $67 million in total revenue. The company's remaining $8.7 million is produced from subscriptions. Advertising and subscription revenue both increased by more than 100% year-over-year. But with the company paying so much of its total revenue in royalties, 50%, it must make investors consider the long-term relevance of this company.

Pandora is a company that is focused on providing customers with the highest quality of individually prepared music. The technology that Pandora uses is exciting. The concept is simple: Listening to only the music that is based on your likes and dislikes. This brings me to my fear that the service is nothing more than a fad and will fade out in the future.

I hope it turns out to be nothing more than a possibility that I mentioned a long time ago but because of the company's structure I believe it has a realistic chance of occurring. The company has created an innovating product but could the innovations of this company lead to bigger and better products from other companies? Pandora is at the height of its popularity and has yet to see a profit and while I believe the company will post a profitable quarter within the next year it does require very high costs. These costs could keep the company from changing its product to keep it interesting. The technology industry changes on a monthly basis and while Pandora is at the height of its use I could easily see a company such as Google (NASDAQ:GOOG) building on Pandora's technology and taking internet radio to a higher level.

Google has the ability and money to build on the success of a company such as Pandora and transform the service. I believe it is logical to conclude that Pandora and its service are not set up for long term growth. It still lacks something, it has innovation, and an interesting product, that connects with people but it must constantly be improving in order to stay at the top. I mention Google because of its size, money, technology, and overall relevance as a corporation with the ability to invent. Pandora has done the best job at utilizing the internet as radio; I believe no one has come close, but is it sustainable? Is it likely that another large company with more money will create something much better in the next two years and turn Pandora into the MySpace of the radio world? I hope not, because I enjoy Pandora's service and believe the company has a legitimate start to building a large corporation. But management cannot be satisfied and must push forward and continue to innovate the company and become more profitable or I believe it is likely that someone will sneak up behind and leave Pandora as a what could have been story.

Finally moving on, Sirius XM is the latest product, yet the first of the products that I now use on a regular basis. Sirius is old but is truly a transcendent service that changed the way some people listen to music or experience the radio. I remember the advertising for Sirius when it originally hit the market. The company focused its advertising on its many channels, no commercials, and cheap price. While the company was transcendent in the industry it is yet to prove to be an innovating service that constantly changes or improves. The services have remained near constant with no significant breakthroughs yet the company has continued to improve revenue.

The chart above shows Sirius' revenue and income over the last five years. The chart shows revenue that increased each year but at inconsistent levels of net income. The company is on pace to post higher revenue and income this year compared to 2010.

Sirius is performing much better in 2011 versus any of the previous five years. Earnings for the most recent quarter showed higher revenue, net income, more subscribers, and a higher retention rate among users. The company has been able to manage this growth without changing much about the product in which it is selling.

Sirius is directly related to the success of the auto market because its product comes standard in many vehicles. Automotive sales have increased over the last year therefore Sirius benefits from the success. I believe this market has been partially responsible for Sirius' success but without change its time may be over. With new forms of radio such as Pandora, the iheart radio from Clear Channel, or other providers with a new technology the future business of the auto giants could be up for grabs unless Sirius changes its service for the future to remain competitive.

Sirius 2.0 is the company's new device for the future. During the recent earnings report, the company gave much needed insight on the new product which has been nothing more than a mystery to investors. The Sirius 2.0 will employ connectivity technologies such as WiFi, Bluetooth, and the internet to compliment the core radio services. The new device is expected to be in two forms and available by the end of the year.

Investors are split with their opinions on this new technology. Some investors believe the Sirius 2.0 will open an entirely new level of opportunities and produce revenue growth similar to that of Pandora. The other half of investors believe the technology is a few years too late and does not compete against the newer technologies from companies such as Pandora. I am somewhere in the middle as I believe the technology is no doubt a step in the right direction but I also believe the new product would have been more successful it the company would have acted faster. It has been a long process and with technology evolving every day there is a legitimate chance that consumers will see the 2.0 as second place to its competitors and not worth buying unless it is standard in a new vehicle.

When everything is said and done I believe the market is large enough to handle each of these services. One reason is that each service is completely different from the other and appeals to different consumers. Pandora gives its customers an individual radio station with only the songs that customers like. Sirius offers everything on the go and I believe is the perfect service for getting everything the subscriber wants, from music to sports. The iTunes platform is a mixture between the two as consumers can choose anything they want and use it anywhere they want. Each offers a service in a large market where each company has the potential for long term success.

Sirius is my favorite between Pandora and iTunes. I love the fact that I can just get in the car, turn it on, and then enjoy. If I do not like something I just turn the station and I can go from music, news, weather, and sports in a matter of seconds, unlike other radios. But someone else may enjoy Pandora as the favorite, it just depends on what you look for in the product. This further adds that the market is large enough for all three companies.

Apple as a company is both transcendent and innovating and the iTunes system is no different. Apple changed the way we receive, listen, view, and experience entertainment by creating a service such as iTunes. I do not believe anyone would suggest Apple will fail or fall from this point. The reason being is that Apple has continued to improve what got them to this point. The company continues to innovate and create new products, it continues to transcend and change the technology sector, and therefore it remains favorable and successful over all other competitors.

Pandora and Sirius are on two different sides of the road yet there is so much competition among the two. Pandora is innovating with its technology as it offers something different and unique. Radio has been established for many years and Pandora took it and changed it into a personalized service. Pandora must capitalize and find ways to become more profitable or there is a legitimate chance that another company with a lot more money that is just as innovating will create something better or equally as good. Pandora must grow and add to its service and continue changing or the service and stock will fall as quickly as technology changes.

Sirius XM is transcendent as it exceeded the usual limits of radio with its breakthrough Satellite radio that offered many channels of uninterrupted entertainment. The problem is that SIRI has been unable to innovate and change with technology. Sirius has managed to produce and grow despite its failure to change. Therefore I believe that SIRI will remain relevant as the auto market continues to grow but if the company does not produce with 2.0 I could easily see the number of new subscribers and retention rates dropping.

Overall the market is big enough for these two companies and the competitors that will come. Pandora needs to keep moving forward by either acquiring companies that will assist in growth or trying to cut down on costs. The company must continue to push forward and not be satisfied with what it has to offer. I believe that Sirius has a better chance of long term success because of its relationship with the auto markets. It would be hard to replace SIRI as a service because of what it offers, I do not believe that any other similar company matches Sirius in overall benefits. Yet it still needs the 2.0 system for long term success and needs to live up to the positive hype. Both companies are well positioned to experience long term growth but each has to keep moving forward and strive to be like Apple which is the complete corporation within entertainment.

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

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