FCC Could Help Pandora And Hurt Sirius

Includes: P, SIRI
by: Crunching Numbers

More than 65% of the cars sold in the US in the second quarter came with a SiriusXM (NASDAQ:SIRI) radio in the dashboard according to the company's second quarter conference call. It is no secret that Sirius dominates this market. It is also a market segment where Pandora (NYSE:P) is trying to make inroads. The latest success of Pandora is evidenced by the recently announced Pandora integration into a car's dashboard by Toyota (NYSE:TM).

Many Sirius enthusiasts will shrug and say "So what?" Sirius has exclusive content. The satellite signal is more reliable and consistent than mobile smartphones that are required by Pandora in the car. Data plans are really expensive compared with the Sirius service.

Well, many folks just want music and can listen to the local sports and news on their AM radio. Sirius is raising their rates on the service, so the cost differential is declining slightly and the FCC could try to change that. In the area of mobile signal strength and consistency, well, the FCC will be trying to change that too.

On October 6, FCC Chairman Julius Genachowski spoke about proposed changes to the Universal Service Fund. "Connecting America: A Plan To Reform and Modernize the Universal Service Fund and Intercarrier Compensation System" was a wide ranging report on findings by the FCC staff about the changing nature of telecommunications and a need to update the fund and redefine its purpose. The Universal Service Fund is comprised of charges levied on all phone bills. According to the FCC website the purpose of the “Federal Universal Service Fee” or “Universal Connectivity Fee” is described as follows:

Because telephones provide a vital link to emergency services, to government services and to surrounding communities, it has been our nation’s policy to promote telephone service to all households since this service began in the 1930s. The USF helps to make phone service affordable and available to all Americans, including consumers with low incomes, those living in areas where the costs of providing telephone service is high, schools and libraries and rural health care providers. Congress has mandated that all telephone companies providing interstate service must contribute to the USF. Although not required to do so by the government, many carriers choose to pass their contribution costs on to their customers in the form of a line item, often called the “Federal Universal Service Fee” or “Universal Connectivity Fee.”

A Bloomberg article reported that the fund paid out $4.3 billion in 2010 and a coalition led by Verizon (NYSE:VZ) and AT&T (NYSE:T) asked the FCC to reduce these fees "which can amount to as much as $8 billion annually."

Genachowski noted that the fund is outdated, can pay out more than $20,000 per year to support phone lines to a single customer and needs to be changed. He would like to create a "Connect America Fund" with the objective of using the new fund to promote broadband access to areas where it is currently unavailable.

But it is the second part of the plan that could help companies like Pandora and impact Sirius. This part deals with mobile broadband. He noted:

The Connect America Fund's other goal will be ensuring universal availability of mobile broadband through a new Mobility Fund. We will extend deployment of state-of-the-art mobile broadband to more than one hundred thousand road-miles, where millions of Americans live, work, and travel. This will begin with a one-time shot-in-the arm to accelerate deployment of 4G networks. Thereafter, the Mobility Fund will provide significant ongoing support for rural mobile broadband.

If one is a fan of Pandora, then the consistency of the signal issue could be dramatically reduced. It should also be noted that the FCC regulates certain interconnection fees through a complex system that has become outdated with the introduction of VoIP and the gains in mobile telephony. The FCC will get more involved in non-traditional telephone services as part of this program. Genachowski said, "Past experience confirms our estimate that wireless consumers will see more than $1 billion in annual benefits from ICC reform." If wireless customers are going to get savings, another piece of the Sirius subscription vs. Pandora data charges advantage could be reduced.

From the Bloomberg article cited above:

The plan outlined by Genachowski today left a number of questions unanswered, Art Brodsky, a spokesman for Washington- based advocacy group Public Knowledge, said in an e-mail.

“There is still a big question mark whether the FCC has the authority to deal with broadband as the Chairman wants to do,” Brodsky said.

In the current Washington environment, it would be nearly impossible for the FCC to implement its proposals if Congressional approval via a new telecommunications act is required, but it's probably worth keeping an eye on.

Disclosure: I am long SIRI, VZ and T. I have $3 January 2012 covered calls against most of my Sirius position. I may initiate (or close) a buy stock/sell option position discussed in another recent article at any time. I have no position in any of the other companies noted in this article.

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