3 Reasons for Sirius XM to Worry About Streaming

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Music streaming is a conversation killer in a debate between Sirius XM Radio (NAS: SIRI) bulls and bears.

Bulls will argue that streaming poses high logistical obstacles in challenging satellite radio. Coast-to-coast wireless connectivity isn't feasible. Carriers are starting to move away from unlimited data plans, so even ad-supported free streams are no longer technically free. Premium original content is also sorely lacking in the streaming space.

Bears will counter that stronger wireless networks are on the way, and that dashboard technology is advancing at a heady rate to make in-car streaming as seamless as possible.

Both camps have their points.

I'm a Sirius XM bull, but I'm also a realist. Streaming is for real, and it's something that will grow into more of a thorn in the media giant's side in the coming years. Let's go over a few of the reasons to watch the trend closely.

1. Pandora is here to stay
Sirius XM investors often chuckle at Pandora Media's (NYS: P) profitless ways, perhaps unaware that they were in the same predicament a couple of years ago. Satellite radio bears argued that even the merger between Sirius and XM wouldn't put an end to the billions in accumulated deficits.

Well, I'm here to tell you that Pandora will be profitable. The more optimistic analysts feel that Pandora may be in the black as soon as next year, but even the pessimists can't deny the benefits of Pandora's booming popularity. Ad rates will inch higher. Bandwidth costs per hour will inch lower. Even with record companies taking meaty bites, the model is scalable enough to work once more advertisers come around.

I urged investors to steer clear of Pandora's IPO when it popped higher in its June debut, but we need to separate the company from the stock.

Pandora itself continues to be a fast-growing service. It delivered 1.8 billion hours of listening in its latest quarter, 125% more than it did a year earlier. There are a finite number of eardrums out there, so doesn't this at some point come at the expense of Sirius XM listeners?

Don't answer right away. Consider that Pandora may have started as a PC-tethered music discovery site, but now half of its advertising revenue is coming from mobile streaming.

Carmakers continue to beef up their dashboard entertainment options. Toyota's (NYS: TM) Entune and Ford's (NYS: F) SYNC AppLink deliver easy Pandora streaming through car speakers.

Sirius XM's conversion rate continues to slip. Just 45.2% of new car buyers became self-paying subscribers after their free trials ran out during the second quarter, down from the 46.7% conversion rate a year earlier. Was the economy that much better a year ago, or are drivers with easier access to Pandora and other audio streams finding a Sirius XM account less compelling?

2. An iHeartRadio upgrade is on the way
We're now just two weeks away from a defining moment for Clear Channel (OTC: CCMO). The terrestrial radio giant is relaunching its iHeartRadio app, beefing up smartphone access to 750 radio stations with a suite of Pandora-like features.

Clear Channel has been hyping up a promotional star-studded concert that will serve to launch the upgrade through its hundreds of stations. In other words, it's educating non-Sirius XM subscribers on the merits of streaming.

This is important, because this is the target audience that Sirius XM needs to reach if it wants to grow its subscriber base.

3. Sirius XM itself is streaming along
It's been two years since Sirius XM introduced its streaming app for Apple (NAS: AAPL) iPhone and iPod touch devices. Android and BlackBerry apps followed. Sirius XM doesn't seem to have gained a lot of traction on that front, but that may change when it rolls out Sirius XM 2.0 later this year.

The new generation of receivers will offer more content and slicker features. There will also possibly be some Web-tethered components to provide greater customization and relevance. We'll have to wait until the official details come out, but one can imagine that Sirius XM wouldn't have been in a rush to upgrade its receivers -- potentially alienating existing subscribers -- if it didn't feel a need to stay ahead of Pandora, Spotify, and other wireless streaming platforms that are gaining in momentum.

In an ideal world, Sirius XM will be able to turn this challenge into an opportunity. If it raises the bar with Sirius XM 2.0, bulls can argue that Pandora and iHeartRadio are essentially educating radio listeners on what Sirius XM will grow into.

Friend or foe, Sirius XM bulls and bears can't ignore streaming anymore.

If you want to see how Sirius XM stands up to the stream teams, addSirius XM Radioto My Watchlist.

At the time this article was published The Motley Fool owns shares of Ford Motor and Apple.Motley Fool newsletter serviceshave recommended buying shares of Ford Motor and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story, except for Ford. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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