Apple’s iRadio Is A Big Upside: Sirius XM And Pandora Watch Out

Image representing Apple as depicted in CrunchBase

Image via CrunchBase

Apple (NASDAQ: AAPL) wrapped up a deal with Sony Music, the world’s largest music publishing company, just before the iPhone maker’s WWDC event on Monday, June 10. Apple was expected to make the announcement of iRadio during the event. The deal with Sony makes the Japanese company Apple’s third major music-publishing partner for iRadio services. Apple had previously signed deals with Warner Music Group and Universal Music Group. These deals also sound alarm bells to other Radio service providers in the market, which include Sirius XMRadio (NASDAQ: SIRI) and Pandora Media (NYSE: P).

Pandora’s negative operating and profit margins despite growing revenues, by over 55% means high cost of doing business. Pandora is currently also running on an overdraft of $2.28 million in terms of operating cash flow for the trailing 12-months. The company’s revenues stand at just $2.77 per share for the trailing 12-months. On the other hand, Sirius XM operating cash flows stand at $935 million, but has a total debt of $2.39 billion, or a Debt/Equity ratio of 63.90 from the most recent quarter. Pandora has no debt position as per its most recent quarter results.

Apple’s iRadio will bring it a little gain, but huge harm to Pandora

Apple is entering an industry already dominated by Pandora, with Sirius XM also beginning to make inroads. The internet-radio service industry holds a lot of potential, especially considering increase in the usage of smartphones and tablets. Sirius XM’s radio service business is driven by its car radio subscriptions, and is also looking to mount challenge on internet-radio services.Google also launched internet radio service, the All Access music service for the Play store, which could also prove to be a major player going forward.

However, the bottom line is Apple’s announcement seems to encroach more on Pandora’s business, than it does for Sirius XM, at least for now. In the long-term, Apple could still encroach in Sirius XM’s car business, as it continues to build devices that can be enabled for car integration, like we’ve noticed with iPod out and Siri Eyes Free. The company already has iOS integrated in some of the world’s luxury brands like BMW, which creates an opening to iRadio integration.

Apple’s chance of scoring big with iRadio is wrapped around its music streaming unit, iTunes. Integration with iTunes, the world’s largest music streaming platform, could foster iRadio subscriptions. Currently, the company has over 500 million subscribers to iTunes. However, compared to the low subscription statistics to internet radio, as exhibited by Pandora’s revenues (well under $500 million), this means that Apple’s opportunity might be placed on the same scale, which could result in insignificant gains. However, its presence is bound to cause more harm, especially due to its brand and devices. iOS users who subscribe to Pandora and Sirius XM, could be tempted into using the ad supported service for free.

The low revenues emanating from internet radio service providers are indicative of a low penetration market. This begs the question, where Apple will get its numbers. The most likely source will be those already subscribed to other internet radio services like Pandora and Sirius XM, and of course from its iTunes users. This means that depending on how Apple manages to attract subscribers, whether it’s because of the iOS free ad supported service or its partnerships with Sony, Warner Music Group and Universal Music Group, could be bad news for Pandora. Additionally, this means that, going forward,  Sirius XM will not be the only competitor to Pandora. Apple is in, and with the intention to dominate the market, the two should watch out.

The internet radio service industry has a huge potential, but penetration seems to be a major obstacle. Additionally, the high cost of internet also seems to deter subscribers, since it’s not like playing songs you have saved on a memory card. With cheaper internet, we could see the market beginning to adopt the service en masse.

The bottom line

Apple is incomparable to the likes of Sirius XM and Pandora, when determining valuation. The iPhone maker is a giant with several revenue streams. iRadio is definitely going to be an upside as a unit for the company; however, the significance on Apple’s overall income might not be as much at all. Similarly, Google’s All Access service available in the Play store is likely to be nothing more than a balancing figure in terms of revenue.

Inasmuch as this venture may not result in any immediate significant revenues for Apple, the impact on Pandora and sometime in the future, Sirius XM, could be huge. Pandora has a market cap of $2.64 billion, while Sirius XM’s market cap is pegged at $22.08 billion. These are nothing but percentage points compared to Apple’s market cap of $414 billion. The internet radio market seems to be lacking in penetration, while the opportunity is quite large. This means that currently, Apple’s immediate market may yet be people subscribed to Pandora, or Sirius XM, as well as some iTunes subscribers.

iRadio’s revenues will not impact on Apple’s overall revenues for the time being. However, the company holds a major advantage over its competitors, especially because it has its own operating system for smart devices, iOS, and its own smart devices; iPads, iPods and iPhones, which it can use to offer iRadio services.

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One Response to Apple’s iRadio Is A Big Upside: Sirius XM And Pandora Watch Out

  1. Pingback: Pandora’s In-Car Installation Is No Danger to Sirius XM | Market Pitch

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