Here’s Why The SiriusXM Pandora Deal Makes So Much Sense

Now that some of the dust has settled on SiriusXM’s $3.5 billion acquisition of streaming service Pandora, things have become a little clearer on why the deal makes sense for both parties. Although the all-stock transaction was announced last month, it’s expected to close in the first quarter of 2019. This is a win/win if there ever was one as SiriusXM now becomes a somewhat different yet formidable competitor to Spotify and Apple Music.

A little background first. Pandora is a radio-like non-interactive audio streaming service that’s based on algorithmically generated channels based on user preference and consumption. Basically, the more you use it, the more it understands your likes and dislikes and it responds accordingly with suggestions. The company today is focused solely on the U.S. market after experiments in Australia and New Zealand, which were discontinued in 2017. SiriusXM had previously invested $480 million for a 19 percent share in Pandora back in July of 2017.

SiriusXM is a satellite radio-style platform with a fairly large base of paid consumers centered around the car. It does have a streaming feature as well, but that’s not why people subscribe to the service. It’s the alternative to terrestrial radio during their drive time in the car that makes it attractive. The fact that both services are non-interactive (you can’t just dial up a song or album, you have to wait for it to be played like on the radio) is where the similarity ends, and for both services, that’s a good thing. Let’s take a look at the pros and cons of the deal.

Pros

This is great for SiriusXM on multiple levels.

First of all, it gets Pandora’s 70 million+ users (SiriusXM has 36 million) along with their data and credit card info. What’s better is that it appears that there’s little overlap between the audiences. What’s better than tripling your audience in one fell swoop?

Second, it provides online streaming reach for SiriusXM that it didn’t have before. Yes, Sirius has a streaming component, but it’s tiny compared to what Pandora brings to the table. Sirius really needed a more visible online presence and now it has it.

For Pandora, this brings some new blood into a universe that sorely needs it, but more importantly, it saves it from the long death spiral that it was in. Even with 7o million monthly users, only 5.6 million were paid subscribers and the company hasn’t been very successful in moving its freemium members to its paid tier. That has resulted in a more than $200 million loss in the first half of 2018, but if the board approves the deal, those worries will soon be a distant memory.

Cons

When it comes to music royalties, SiriusXM currently has a 15.5% royalty, while Pandora is around 50%. The low rate allows the company to actually show a profit, but it also wisely shows the royalty as a separate line item on the bill apart from the subscription. This keeps the subscription rate artificially low while showing that a significant portion is going to music royalties, which can be interpreted as helping artists that the user supports, or “it’s those damn musicians fault” that the bill is so high.

Because of the different royalty rates, there’s probably no way that the companies are going to combine their channels. Sirius will want to maintain the low rate and not be subject to the higher profit-draining rate that Pandora pays. That said, it should be interesting the next time label licensing negotiations come around.

The Big Win

This deal makes SiriusXM “the world’s largest audio entertainment company” with more than $7 billion in revenue and a $41 billion value, but the big win for both companies is the cross-promotion aspects. First of all, it will create a bigger ad sales force with more reach and more products to sell. Probably the biggest part of this is the fact that Sirius can now provide a downsell path for its 23 million yearly free trial users. Many end up as paying subscribers, but the ones that decide against it can now be sold on a less expensive Pandora package instead. In other words, it’s another opportunity to keep the trial user a customer.

In the end, SiriusXM needed to be online and Pandora need a financial boost, and that’s what both companies got and more. Because it makes such perfect sense for both companies the big question is, what took it so long to happen?