It’s official: SiriusXM reports that it will be buying Pandora for a total of $3.5 billion, creating the largest audio-based entertainment company in the world.
With Pandora’s 70 million active users, SiriusXM will effectively triple its total subscriber numbers after the deal. Though the deal didn’t come out of nowhere — SiriusXM already owned 19% of Pandora’s stock — it may lead to some interesting things within the audio market.
Could SiriusXM Have Made a Mistake?
SiriusXM’s stock fell following the news of its recent acquisition, as did Pandora’s (though to a significantly lesser extent). It would seem that both analysts and the market believe that SiriusXM is making a mistake. While only time can tell whether the move was the strategically correct one, there are a few glaring red flags:
Though Pandora has been growing, its profit has not. Pandora has been able to grow its revenue to $1.47 billion annually, but its net loss is $518.40 million and increasing over time. While aggressive growth can account for some of this revenue loss, it cannot account for all of it. In fact, both its usage and its active user numbers have been trending downward over time.
Pandora has a number of significant competitors, such as Spotify. By the end of Q2 2018, Spotify had a total of 180 million monthly active users and 83 million premium users; Spotify has more users in both the “free” and “paid” subscription classes than Pandora and SiriusXM. If Pandora is losing traction, this could factor in.
The market may be moving on. Some of Pandora’s issues are very similar to SiriusXM’s issues: not only have customers moved on to streaming services, but they are also moving to on-demand services. Rather than listening to randomly selected playlists, customers are making their own playlists and selecting their own songs.
Pandora isn’t scalable. Pandora’s profit margins have been hurt by its own success, as the more successful the company has become, the more it has had to pay in royalties. In other words, it’s a company that is already being killed by popularity, and attempts to grow the company further without resolving this could only lead to further loss.
SiriusXM itself has been performing well; though they haven’t been doing remarkably well, they have at least been turning out reasonable numbers. It’s perhaps due to this that SiriusXM chose to purchase Pandora through its own shares rather than through purchasing it in cash — another potential issue on the horizon.
The Change in Media for Consumers
For consumers, it’s likely that this shift from Pandora to SiriusXM will be virtually invisible. SiriusXM isn’t looking to merge the products or to later them, but rather to expand its own reach. SiriusXM is primarily a car entertainment service, and — perhaps more importantly — it’s a car entertainment service that is being rapidly outpaced in the market by streaming services such as Spotify and Pandora. Purchasing Pandora may be one last attempt at “If you can’t beat them, join them.”
By expanding into Pandora, SiriusXM is able to reach out to larger user base, when they were previously relegated solely to users who were listening to music in their car. This has advertising potential, but the fact that Pandora itself is not profitable may ultimately make this type of monetization problematic.
Many financial experts are currently hesitant about SiriusXM’s future, as it appears as though Pandora is currently overvalued. Even with its aggressive attempts at growth, Pandora hasn’t been able to outpace its own competition. It remains to be seen what SiriusXM can bring to this situation.
At the same time, SiriusXM itself has been steadily losing hold on the market as streaming services become more popular, and having access to Pandora’s technology and its present user base may be what SiriusXM needs to grow into the new and emerging markets. With new solutions such as Apple CarPlay and Android Auto, users are becoming less likely to sign up for satellite-based entertainment, even if it is one of the integrated options.
Regards,
Ethan Warrick
Editor
Wealth Authority
