Sirius XM Investors Can't Ignore Pandora

Internet radio grabs the mic on Thursday when Pandora (NYS: P) reports its quarterly results.

Sirius XM Radio (NAS: SIRI) investors probably think that the report doesn't matter. Sirius XM is the profitable one. It's the satellite radio giant hitting fresh four-year highs while Pandora's trading well below last year's $16 IPO.

However, Sirius XM should be taking notes -- for all the right reasons.

Growth is not mutually exclusive
We already know that Pandora itself isn't a threat to Sirius XM's growth. Pandora's popularity is growing quickly, yet Sirius XM has closed out each of the past dozen quarters with more subscribers than it had three months earlier.

Sirius XM still sees something worth emulating in Pandora, and it's why the company is rolling out personalized radio for its streaming subscribers this year. It may be more of a retention tool than a means for attraction, but Sirius XM is taking its streaming platform pretty seriously these days.

It's easy to see why.

Pandora had 54.9 million active listeners at the end of July, a 48% advance over the past year. Pandora also served up 1.12 billion hours of digital music and comedy last month, 76% ahead of last July's traffic. In other words, not only is Pandora's fan base growing, but its listeners are tuning in more on average.

Sirius XM obviously isn't growing nearly as fast. It's premium radio, whereas most of Pandora's subscribers put up with ads and song-skipping limits in exchange for free tunes. The result is that Pandora may have twice as many active accounts as Sirius XM but it generates just an eighth of the revenue and none of the profitability.

The Netflix rule
Pandora is very important to Sirius XM. It now has deals with more than two dozen automakers so that smartphone-armed drivers can seamlessly stream the music discovery service through their car speakers.

This success could've been a dagger to both terrestrial and satellite radio, but it hasn't played out that way. Sirius XM is still growing, and even an old-school radio company -- Cumulus Media (NAS: CMLS) -- has only seen its revenue shrink 3% through the first half of this year.

Pandora is actually doing Sirius XM a favor. It is educating the market. It is creating the infrastructure. Just as Netflix (NAS: NFLX) has paved the way for streaming video by striking deals to make it easy to stream TV shows and movies where consumers prefer to watch them -- on the living room couch -- Pandora has taken streaming on the road, where radio is largely consumed.

In other words, once Sirius XM has the streaming product just right, it will be that much easier to turn on the car-streaming ignition.

It's almost there.

Sirius XM On Demand -- giving subscribers who pay for online access the ability to stream more than 200 of its shows on their terms -- was announced earlier this month. The media giant's Pandora-like personalized radio project is still on track to roll out later this year.

It won't be long before even folks with functional satellite receivers in their cars start taking advantage of the more convenient and customized Sirius XM digital offerings.

Netflix has made it easier for any streaming video service to gain traction. Pandora is cutting down Sirius XM's learning curve in streaming audio.

So Sirius XM investors should tune in when Pandora reports on Thursday. They should applaud the growth and the platform-widening deals.

Pandora's no longer the enemy. Pandora's the road map for a promising new revenue channel that will ultimately make Sirius XM's flagship service that much more valuable.

Streaming matters.

Running of the bulls
I remain bullish on Sirius XM's future. It should come as no surprise that I'm promoting the CAPScall initiative for accountability by reiterating my bullish call on Sirius XM for Motley Fool CAPS.

I also just put out a premium report on Sirius XM Radio, detailing the challenges and opportunities that await investors whether they are long or short the dynamic media giant. A year of updates is also included with the report. Check it out now.

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