by Brad Moon | August 10, 2012 11:44 am
Sirius XM Radio (NASDAQ:SIRI) has been through some rough patches, but now finds itself at the confluence of two trends that look to boost its bottom line. Mobile carriers killing off their unlimited data plans has put a serious crimp in the plans of competitors in Internet radio who had been eying the auto sector for expansion; at the same time, as new-car sales pick up, the potential pool of new satellite radio subscribers is growing.
Both technologies overcome the limited broadcast range of FM radio. Satellite radio uses satellites (as you’d imagine) to relay a signal, and with the coverage provided, this means a favorite station can be followed on a coast-to-coast road trip. Satellite radio uses a paid subscription model, and many stations are free from advertising — another distinct advantage over traditional FM radio.
However, it’s that cost that limits adoption. Sirius XM subscriptions start at $14.49 monthly. In addition, a dock is needed in each location (car, home or otherwise) where you wish to listen, and if you have multiple users with cars, you need multiple receivers/subscriptions.
Internet radio offers many of the advantages of satellite radio. However, instead of charging users a subscription fee, most Internet radio providers go with an ad-based revenue model. The trade-off for users is the immense variety of stations and convenience: Internet radio doesn’t require any special equipment. All that’s needed is an Internet-connected computer or smartphone. Pandora (NYSE:P) is the market leader, but there are many alternatives, including iHeartRadio, TuneIn Radio, Spotify and Slacker Radio.
For the best listening experience, many users choose Internet radio streams at 128kbps. This is sufficient quality for casual listening — by contrast, Apple’s (NASDAQ:AAPL) iTunes Store sells songs at 256kbps.
What exactly does 128kbps translate to in terms of data usage? Well, it didn’t matter when mobile users had unlimited data plans. But now it does. According to Internet streaming service miRoamer, the math works out like this: 128kbps for two hours per day uses roughly 3.2 GB of data per month. Consider, for instance, that many people opt for AT&T‘s (NYSE:T) 300 MB or 3 GB data plans for cost purposes.
That 3.2 GB/month varies based on actual usage, stream rate (some listeners are fine at a lower-quality 64kbps) and compression schemes, but you can see the problem when it comes to mobile use, especially for extended periods of using cellular data — like commuting.
Sirius XM isn’t affected by mobile data caps, at least as far as its receivers are concerned. Its customers enjoy an all-you-can-listen-to flat, monthly rate for their satellite access. If you want to listen to Sirius’ channels as you walk to work, you can use the company’s app — but then those data caps take hold, and you do have to pay extra per month to use the app (Sirius also offers online-only plans).
Odds are that people on the move will switch to lower-quality Internet streams to conserve bandwidth instead, or use the gigabytes of storage on their smartphone to carry around a playlist of their own tunes.
Where satellite radio has a distinct advantage is automobiles. Two out of every three new cars sold in the U.S. today are equipped with satellite radio. That eliminates the barrier of convincing consumers to buy a receiver. Many also include a free trial subscription with Sirius XM.
New-car sales are up in the U.S., and this — combined with mobile data caps that make streaming Internet radio through a smartphone to a car stereo, or directly through an in-car app, less attractive — means Sirius XM has a good chance of boosting its subscribership. According to Barron’s, the company’s original estimates of adding 1.5 million subscribers this year has been boosted to 1.6 million, with the possibility that it could reach 2 million.
When the economy tanked and U.S. new-car sales plummeted in 2008-09, Sirius XM plunged into penny-stock prices. Since then, it has rebounded strongly — at roughly 500% annual gains, including more moderate 30% year-to-date returns in 2012 — to the $2.50 range. That’s nowhere near its heady $61 days in 2000, but still certainly headed in the right direction.
Pandora and other Internet radio services continue to work on revenue models (primarily ad-based or premium, ad-free subscriptions); whether these pan out or not, their growth is tied largely to mobile devices, which continue to sell at a record pace.
They have the home market sewn up, between smartphones, tablets, speaker docks and home audio equipment that increasingly includes built-in access to Internet radio. Urban mobile users with easy access to free public Wi-Fi hotspots likely will continue to listen to their preferred streaming music app, so don’t expect wireless data caps to cause a huge drop in usage there.
However, plans to make Internet radio a standard feature on auto entertainment systems have been jeopardized. Although some automakers had begun adding Pandora capability, customers who are worried about rationing their cellular data use are likely to tune out.
After all, why worry about a nasty bill from AT&T at the end of the month if you can stream the 500 songs on your iPhone to your car stereo, pay to activate that ad-free satellite radio that’s already included, or just deal with old-school FM during the commute?
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
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