Internet Radio Versus Satellite Radio: Why SiriusXM Has the Edge over Pandora

Sirius XM (NASDAQ:SIRI) satellite radio and Pandora (NYSE:P) Internet radio have become the industry leaders in redefining the radio listening experience. These two companies have different business models but their target audiences have become more of the same as they attempt to take the radio into new and exciting markets. The future is bright for both, but I believe that one of them has the upper hand and is the better bet as the enhanced radio industry leader.

Sirius XM Radio (NASDAQ:SIRI) specializes in subscription-based digital radio and with 135 commercial-free radio stations; SIRI is becoming the industry leader. SIRI has agreements to offer its products as factory or dealer installed equipment with every major automaker and has become the standard for commercial-free vehicle radio. SIRI is mostly known for offering music and news but that is just the tip of the iceberg. Sports, talk, entertainment, weather and travel are other programs that SIRI offers and as the company continues to grow, I’d expect that list to continue to grow as well.

The fascinating detail regarding how SIRI works is in its satellites. SIRI owns nine orbiting satellites total, combining the satellites in the SIRIUS system with the satellites in the XM system, and a tenth satellite that is on reserve as a spare. The company has an additional satellite being developed and hopes that it will be launched at some point this quarter. SIRI’s satellite radio services also extend beyond the automobile. SIRI has radio channels with Dish Network (NASDAQ:DISH) and a number of radio channels available through subscriptions with major mobile phone companies such as AT&T (NYSE:T), Sprint (NYSE:S), and Research In Motion (RIMM). SIRI has minority ownership in Sirius Canada and hopes to continue to extend its presence globally.

Pandora (NYSE:P) provides Internet radio services in the U.S. and it offers a personalized experience for each listener. This form of radio utilizes inherent characteristics of music to form radio stations and then creates a playlists that allows for real-time feedback for listeners. Much like SIRI, P offers its radio services to mobile phones such as Android phones, the iPhone, and Blackberry phones. In early December of this year, Ford Motor Company (F) announced that it will add Pandora to its 2012 truck line-up, joining Honda (HMC) and Toyota (TM), among others, as automakers that have contracts with P. Seasonal radio stations have recently been added to the list of radio options and P has become a campaign vehicle for public office hopefuls by helping candidates reach voters effortlessly and more effectively through campaign adds. Both SIRI and P are changing the way we listen to the radio and more and more options are becoming available daily as these companies continue to grow. Both companies are implementing promising business models but we need to look at the financial results and growth prospects to decide which is going to be the industry leader in the future.

In 2010, SIRI told investors that the company would grow its subscriber base by 500,000 and by year-end, SIRI had more than doubled that amount with 1.4 million new subscribers. Also, free cash flow from 2008 to 2010 has increased from $-283 million to positive $201 million and SIRI has experienced growth in net income over the past two years from $-352.04 million in 2009 to $43.06 million in 2010. These are two sure signs that SIRI is focused on expanding its customer base and making growth a priority. Capital expenditures have been decreasing for SIRI and after the launch of their next satellite into orbit in the fourth quarter of this year their satellite replacement cycle will be done. This is significant because this will enable satellite capital expenditures to decline by nearly $90 million in 2011 and by an additional $100 million in 2012, which will amount to nearly zero capital expenditures for satellites until 2016 or 2017. With the company not spending the extra capital on satellites, this will enable them to work on other research and development projects and further expand their radio presence.

P is a very young company and that shows when analyzing its financial statements. Revenues have increased for the company over the past two years, increasing from $55 million in 2010 to $138 million in 2011. However, with net income of $-9 million and earnings per share of -.22, the company has yet to make a profit but that is expected of a start up company. P generates revenue from advertisements that are aired on its radio stations. Its most basic radio is free but listeners can upgrade to commercial-free radio for a fee. It is evident that P is expanding into many different avenues with its radio services and this is sure to generate more revenues in the future. P has yet to get into the sports and weather stations like its rival SIRI but I would suspect that offering such services would be on the horizon for P. I believe that P has great potential in the future, especially as it extends its availability to more and more mediums, and the future is bright and profitable for them. P recently announced that the number of listeners reached 1 million in both New York and in Los Angeles for the time frame of mid-October to mid-November, with high ratings in other metropolitan areas as well.

SIRI and P have both experienced a significant increase in listeners and an increase in their availability by getting contracts with automakers, mobile phone companies, and more. However, P has a negative bottom line because it is a young start up. Though its future is promising and I believe that in the long term this company will be around and will become very profitable, it is hard for me to suggest it as my pick over SIRI. SIRI has developed into a profitable company, and with the drastic increase in cash flows and in net income, the right actions are being taken to increase shareholder wealth. At this point in time I would suggest that SIRI is the better bet over P. It is difficult to predict the future, and with a hurting economy it is tough to discern whether or not P can withstand the ever-changing economic factors that determine the success of companies that are trying to get their feet off the ground. P is definitely a company to look out for and it is exciting to see where the company will take interest radio. I still like SIRI because they have the business model and the financials to back their model and I like the direction that the company is going. I would expect to see a continued growth in free cash flows and in earnings over the next few years and, with the continued growth in new subscriptions, SIRI will become more profitable and good investment in the radio industry.

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