Pandora IPO: Not Yet a Sirius Threat


(P) is the leader in Internet radio while Sirius XM Radio (SIRI) is the king of satellite radio. While many people consider Pandora and Sirius to be direct competitors, these companies have very different business models and plenty of room for growth in their core businesses. Sirius relies almost exclusively on subscriptions while Pandora earns most of its revenue on advertising. Further, much of Pandora's growth is being driven by users on smartphones while Sirius relies on subscribers tuning in from their cars or at the home or office.

Following Pandora's IPO, stock analysis firm Trefis has a near $10 price estimate for Pandora, which is around 20% below the market price. We value Sirius at $2, which is just slightly ahead of its market price.

Personalized Experience vs. E
xclusive Content

Pandora offers radio that streams personalized channels for each listener based on the pre-set preferences and feedback that he or she provides. Apart from its web-based music platform, Pandora also has apps that are available on Apple's (AAPL) iPhone, Research in Motion's (RIMM) BlackBerry and smartphones that operate on Google's (GOOG) Android OS, which are helping to drive growth in its mobile ad revenues. We estimate that mobile advertising contributes almost 60% of the company's value.

Where it is stepping on Sirius's toes is by developing relationships with auto manufacturers to develop applications that will sync Pandora with a car's stereo systems. It has existing agreements with Ford (F), BMW's MINI (ETR:BMW) and Daimler's (ETR:DAI) Mercedes, and is in talks with several other car companies.

While Pandora is free for users, Sirius uses a subscription model that offers advertisement-free satellite radio services and exclusive content. It features 180 channels of music, sports, talk shows and news that provides a wider selection to its listeners than Pandora. The firm's satellite services are primarily transmitted to users in cars or who use its services in retail locations.

Ad vs. subscription based models

In 2010, ad-generated revenues accounted for 87% of Pandora's total revenues and only 2% of Sirius's revenues. During the same period, subscription revenues represented 86% of Sirius's total revenues and only 13% of Pandora's.

Given that the nature of their services vary in addition to the different distribution and revenue models, we believe that Pandora and Sirius XM can be viewed as complements for now rather than competitors. Pandora would have a difficult time competing with Sirius in offering premium content because Sirius has established relationships with major radio talk show hosts and for major events. On the other hand, Pandora's popularity rides off its "free" and customizable services while Sirius's major selling point is ad-free content.

See our analysis for Sirius XM RadioSee our analysis for Pandora

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