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Why the Sirius Investment in Pandora Is a Win-Win Situation

Pandora’s Friday morning announcement that it had secured a $480 million investment from Sirius XM and agreed to sell its ticketing unit Ticketfly put an end to looming speculations about an outright sale of the company. The major cash infusion is good news for both companies, providing them with ways to leverage each other’s strengths and thrive in a changing market.

First, a recap of the news: Sirius is spending $480 million on preferred Pandora stock, which gets the company a 19% stake in the music streaming service. Sirius will also have three seats on Pandora’s board, and Pandora separately agreed to sell its Ticketfly ticketing unit to Eventbrite for $200 million.

What’s in it for Sirius XM

Sirius XM has done well with its existing satellite radio subscription business, generating $5 billion in revenue and $746 million in net income in 2016. The company had 31.6 million subscribers at the end of Q1 of 2017, and expects to add 1.3 million paying subscribers in 2017.

However, Sirius’ business is highly dependent on the automotive market, which is changing as cars are becoming connected, capable of accessing other services over the internet. Sirius isn’t just lacking an internet strategy, the company also doesn’t have a real answer to the growing popularity of on-demand streaming services like Apple Music and Spotify.

The Pandora investment represents a kind of long-term insurance policy for Sirius against these market shifts. What’s more, with a stake in Pandora, Sirius is also for the first time set to profit from ad-supported radio, allowing it to attack traditional terrestrial radio on two fronts. At the same time, Sirius doesn’t have to shoulder all of Pandora’s risk in a volatile market that is highly dependent on licensing agreements, as Barklays analyst Kannan Venkateshwar remarked in a note sent out Friday morning: “It makes sense that the investment is structured in a manner that protects (Sirius XM) from these risks.”

What’s in it for Pandora

Pandora has spent the past 18 months on a radical transformation, a process that culminated with the launch of its premium tier in March. Before that, Pandora was primarily focused on ad-supported streaming. Now, it is also offering a full on-demand service to directly compete with Spotify and Apple Music. Pandora’s plan is to convert a significant subset of its free user base to paying subscribers, and then operate both free and paid streaming complementary, a recipe that has fueled Spotify’s massive growth.

A well-designed product and a built-in target audience of 80 million monthly users provide Pandora with a big advantage over any newcomer. But competitors like Apple and Spotify still have a significant head-start, especially in international markets where Pandora is virtually unknown.

This means that growing Pandora’s paid business will take time and resources. Investors were unwilling to give the company either, and skittish at every bump in the road. The Sirius investment not only provides Pandora with a financial lifeline, it’s also a big vote of confidence that Pandora is on the right track.

What the way forward looks like

There are many ways Pandora and Sirius XM could cooperate more closely in the coming months, and not all of them will make sense. For a take on what doesn’t work, just ask the Rdio team, which Pandora acquired in late 2015 to build its on-demand service.

Streaming music service Rdio previously partnered with terrestrial radio giant Cumulus, with Cumulus stations promotion Rdio’s service on air and Rdio streaming Cumulus stations. This kind of cross-promotion may have made sense on paper, but was a disaster in practice as traditional radio listeners simply weren’t looking to pay for on-demand music. Just promoting Pandora on Sirius and vice versa could turn out to be a similar mistake.

But there are many other ways for a more fruitful cooperation. One suggestion, courtesy of Barklays’ Venkateshwar: Sirius could bundle Pandora’s Premium service to offer both ad-free radio and on-demand music for one monthly bill.

Another area may be exclusive content that’s being produced every day at Sirius XM. Pandora has already seen some success with non-music programming, including streams of “This American Life” and “Serial.” With their new partnership, Pandora could start to carry some Sirius-produced originals, and both could venture deeper into the world of podcasting, further securing that they won’t be left behind as the media landscape changes.

 

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