Sirius Is the Piper That Gets Paid
While this shouldn’t be a shocker, it is in digital music. Spotify and Pandora are unprofitable -- as was Napster and many of the dozens of digital music services that flamed out after it. At Sirius, about 29 cents of every dollar in revenue goes into the company's coffers as operating income. That's a higher profit margin than Apple. Not bad for musty satellite radio company.
Sirius's financial bounty is the result of deliberate, profit-obsessed steps by its majority owner, the profit-obsessed John Malone and his Liberty Media holding company. Sirius is on sure footing mostly thanks to pragmatic financial management and the dull work of striking deal after deal to put Sirius radios in new and used cars.
Sirius's fate is still unclear. More future drivers -- or passengers driven in robot-controlled cars -- will listen to web-streamed music rather than Sirius's tunes. Still, healthy finances give Sirius more control to confront technology changes head on. It's a lesson Spotify, Pandora and other digital music companies would be wise to learn.
Sirius XM for years was in worse shape than its digital music peers. The company nearly tipped into bankruptcy protection in 2009 before Liberty swooped in with a loan and helped integrate Sirius with its former rival XM in a previously announced merger. Liberty took control of the company several years later after an ugly fight with Sirius's CEO at the time.
Liberty pared Sirius's debt and set to work taking advantage of its best customers: car owners. It struck deals with all the big automakers to include Sirius radios in the dashboard of new and used cars and gives many of them a cut of fees if the owners pay for Sirius.
The company says three-quarters of new cars come with Sirius radios, and it persuades about 40 percent of owners to pay for a subscription. The vast majority of Sirius's 32 million subscribers came in this way.
Sirius went from burning cash in 2008 to generating $1.5 billion in free cash flow over the last year. Arcane laws help Sirius, too. Under rates set by an arm of the Library of Congress, Sirius pays 11 percent of its revenue to companies that own the recording rights to most popular music. Its fees for music are more predictable than those of Pandora, which under a different legal mandate pays 17 cents for each 100 songs it plays.
Its dependence on the car is Sirius's Achilles' heel, or a potential one. If auto sales slide, so does the number of Sirius's new customers. And changes in technology including fast internet connections built into cars are making it easier for people to use their smartphones to entertain themselves on the road, including listening to music.
Truthfully, though, change in cars will happen slowly. Think about how many 2006 Honda Accords are out there; they're not getting in-dash WiFi.
The biggest worry is Sirius hasn't done enough to future-proof itself. Its mobile app for music streaming is a joke. But its healthy finances should help there, too. Sirius agreed in June to acquire a piece of Pandora, which had been Malone's target for some time. Sirius will have representatives on the board and odds are Liberty will eventually buy all or most of Pandora, which was a pioneer in streaming music and in theory should be a big help to Sirius's strategy beyond the in-car radio.
Its position at Pandora also gives Sirius opportunities to expand its empire. Liberty's assets include Ticketmaster and Live Nation, which puts on many of the country's concerts and music festivals. Analysts including Brandon Ross at BTIG Research have suggested the Liberty companies could eventually collaborate.
Imagine Ticketmaster pitching tickets to the next Harry Styles concert backed by Live Nation to people listening to his songs on Pandora. The mostly free streaming music service, which has about 80 million monthly listeners, can also provide a pipeline of people to convert into paid Sirius subscriptions.
There are hurdles left to overcome, and the company's stock price -- its price-to-earnings ratio is higher than that of Facebook and Google's parent company -- shows investors' hopes are high.
But Sirius's turnaround since the financial crisis is a heartwarming story of survival through smart management. Step back and applaud the pragmatism. Sirius bought itself time to figure out the future while its buzzier digital music brethren drink red ink.