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Sirius XM Faces Serious Competition from Pandora

There's news that Pandora, the Internet design-your-own-channels music service is moving heavily into the automotive space. That's a big problem for Sirius XM (SIRI), because Pandora could potentially deliver music at lower prices and with more user convenience, putting pressure on an all-important market for the economically embattled satellite provider.

As Paul Bonanos at GigaOM reported:

During an early afternoon panel at the SF Music Tech Summit, [Pandora] chief technology officer Tom Conrad said the company's mobile strategy will first hinge on a transitional phase in which its smartphone apps will be controlled from dashboard or steering-wheel interfaces, before dispensing with the smartphones altogether as the service is built into web-connected cars.
Already the company claims that half of its mobile users have the service running in their cars, connecting a portable device like a smartphone to the audio jack. (I'd be interested to hear details of how it comes to this conclusion, as I've found that too many companies do their market studies badly. However, it doesn't seem like an outrageous conclusion.)

The problem for Sirius XM is obvious. As I noted about a month ago, the trend line for subscribers is still turning down, even though it added subscribers in its last quarter. But given the importance of automobile sales to its marketing strategy, guessing that the cash for clunkers program had an impact also seems like a fairly sober conclusion.

In fact, as the filed 10-Q notes, the decrease in subscribers in the third quarter between 2008 and 2009 was "principally the result of 671,341 fewer paid promotional trials due to the decline in North American auto sales." Without cash for clunkers, losing even more would have been likely, and you have to wonder whether there would have been any increase at all.
If not for automobile sales, Sirius would be as hosed as the target of a fire truck. That's why Pandora is such a danger to the company. If you've never used the service (disclosure: I'm a paid subscriber to both Pandora and XM, as well as a user of other music services), it's worth checking it out. With both a limited free version and an annual subscription of only $36 (far cheaper than Sirius XM), you plant a seed of a type of music, like an artist or actually song, and it finds "similar" tracks, streaming them.

It works on a hosted basis, so you can bring up your subscription on any browser. Sirius, on the other hand, makes you enroll physical devices and pay subscriptions for additional ones, even if you're not using them simultaneously. Of course there's a possibility of simultaneous playing, but I suspect that many people use satellite radio in an either/or fashion, having only one on at a time. They essentially pay extra to be able to use a radio in more than one place.

Because Pandora delivers over the Internet and doesn't have announcers, its costs should be significantly lower, hence the ability to offer a transferring subscription at a fraction of the price of one satellite radio connection. Yes, Sirius XM has an iPhone app, but that depends on someone having a subscription. It's as though the two businesses had come to directly inverse marketing models: Sirius depends on people starting in a car and then becoming a subscriber, eventually moving to mobile on the Internet, and Pandora depends on an Internet subscription eventually moving mobile and then into a car.

To my ear, Pandora channels can be overly narrow and there's probably more variety on satellite. Some of the people programming the music selections (Robert Aubry Davis, particularly when it comes to vocal and early music, is an example) have a keen understanding of a given genre, delighting you with unexpected gems. But not all are like that, and the question comes down to whether consumers and automobile manufacturers are going to perceive the difference without already using and comparing both. Given that Pandora can leverage the "freemium" model, it could end up displacing Sirius without the latter ever having had a chance. And that would be pretty bad news for Sirius, and its investors.

Image via Flickr user by ☂CharlotteSpeaks , CC 2.0.

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