Pandora's Losing Battle With SiriusXM, Part I

Includes: P, SIRI
by: Stephen Faulkner

I can feel the pressure already. Dazzle us! We've seen this before, every which way. Can we go one week without another Pandora (NYSE:P) vs. SiriusXM (NASDAQ:SIRI) article? While we're at it, can we go another week without rumors surrounding an Apple (NASDAQ:AAPL) buyout of SiriusXM or speculation around Liberty's (LMCA) upcoming moves?

And he gave unto his readers, when he had made an end of communing with them upon mount Seeking Alpha, an article of testimony, an article of opinion, written with the fingers of Stephen Faulkner!" -- SF 31:18

And so it was written, and so it must be done.

You see, it's hard to resist this topic, no matter if it has been covered ad nauseum. There always seems to be a bit more to discuss. It's a great debate... and one that really needs to be sealed up in a coffin, nailed shut, and buried. And I feel that, eventually, that is almost certain to happen.

For additional reading on this subject, I point you to nice opinion piece by Little Apple: "Sirius XM Satellite Radio Beats Pandora Internet Radio."

I'm going to hone in on a very specific point: cost. I made these comments in the past to some author's articles before recently becoming a contributor here. So, let's have at it! First, I gathered the following data regarding estimates of usage from Pandora's CFO, Steve Cakebread, from Rocco Pendola's article:

We use the most advanced music codec, AAC+, with a typical bitrate of 32 kilobits per second. At this rate, an hour of listening to Pandora on mobile consumes approximately 14 megabytes. Our average listener uses Pandora more than 10 hours per month, (18 hours as of the end of 2011) meaning that even if 100% of that listening were over mobile, it would consume around 140 megabytes per month, which is only 7% of the total usage allowed under a 2 gigabyte per month cap.

I'd like to start by pointing out the problem with this data. In my personal experience having experimented with Pandora this information is just plain wrong, and I feel it is quite misleading. These may be best case scenario estimates, but my own real world testing has proven otherwise. Know your enemy, know yourself, as I preached in a recent article. This is no different. A wise investor always understands his competition, on all fronts.

My results? Pandora uses, on average, 36 megabytes of data per hour of streaming. This is far more than the 14 stated.

Now, considering the average American spends 80 minutes per day in the car (conservative, article cites "an hour and a half"), and Pandora usage in the car will be consuming data through one's smart phone plan, we can get a good estimate of data usage for Pandora in the vehicle on a monthly basis. 30 days x 80 minutes (1.33 hours) x 36MB = 1440 MB.

Let's assume a 2GB data plan. As our phones receive more and more use, we're using more and more data each day. What was once a huge amount of data to have available for a plan, is being taken up in greater and greater chunks through heavier use of our phones and this is a trend that is unlikely to slow anytime soon (unless the cell providers slow it for you against your will... another topic for another article). If Pandora is your radio source, for the average U.S. driver, it will suck 1440 MB off that 2048MB plan.

This leaves a whopping 608MB for "everything else." If you're the average user, you use more than 608MB per month for everything else, and so, you just incurred your first Pandora charge. $10 overage. As time rolls on, you may tick up into $20 worth of overages if you use most of your 2GB plan for other things. Total *real* cost for Pandora ? $14.40 data.

But this is with commercials. Do you want a SiriusXM like experience? You have to pony up an additional $3 for a subscription to cut out those annoying commercials, bringing your cost to $17.40.

Looks very close to the cost of SiriusXM to me, for the everything yearly package, with smartphone app, all content, and crystal clear satellite reception everywhere outside of your favorite diesel fume filled tunnel. Actually, SiriusXM is cheaper this way -- $16.67 per month.

Let's be fair here, though. You like radio outside of your car too. A little bit while taking your dog for a walk or jogging, at the beach, in your helicopter... at a cost of 36 cents per hour in data, that can add up fast. Assuming 1 hour of listening outside of the car per day? Your monthly cost is now $28.2.

Is this assumption unreasonable? Not according to this (pdf):

Adams estimated that the average American-reading one and a half newspapers, half a magazine and one piece of direct mail, and listening to 2.3 hours of radio and watching 3.8 hours of TV-would be exposed to a minimum of 560 advertisements in a 16-hour period.

2.3 hours seems to match up nicely with my estimate of 2.333. This is the important number not the average "now" because Pandora will want users to be their one choice for radio. This is also very close to my $28.20 estimation above, or $25.20 per month with ads.

I found it humorous, that in a recent much hyped analyst rating on SiriusXM, after I made those comments weeks ago, I found this gem:

Given the size of the addressable market (primarily in-car audio), and the quality of SIRI's content, we believe that growth on both platforms is entirely compatible," he writes. "Using streaming media in-car is not without cost; a customer on a tiered wireless data plan using Pandora whenever he's in the car would generate ~$26/month in usage charges.

Pandora pushers/SiriusXM bashers loved to trumpet the analyst's $2 price target for SiriusXM, but for some reason his estimate of $26/month for Pandora was swept under the carpet and ignored. I question where this analyst got his information from, too... could it have been from my comments on Rocco's article? I wouldn't be surprised, seeing that I can't find another ~$26 estimate out there.

Cost for SiriusXM? Remains a cool $16.67 per month, for far more in content, availability, and depth of features.

While Pandora is a cool idea -- it comes with a cost, and compared to SiriusXM, that actual cost is significant. There will always be the exceptions -- the home user, the "hotspot" guy, and the 2 hour per week guy. Given the data, though, for the average American, SiriusXM is the clear winner in the cost category.

In Part II I'll explore the pitfalls of Pandora's advertising model, and the low barrier to entry in the internet radio space, and why this is a recipe for failure.

Disclosure: I am long SIRI and SIRI March $2 calls. I may enter and exit positions in P put options at any time.