Pandora Media Inc (P), Sirius XM Radio Inc (SIRI): The Future of Radio, and All We Hear Is…

Here’s a secret most insiders aren’t going to spill to you: radio is in trouble, real trouble.

Understand me, I adore radio. The babbling disc jockeys, the friendly and comforting music and even – as I get older – the informative talk radio of NPR and the BBC. Radio has stood by me, comforted me and often encouraged me to become a stronger person just by playing music and keeping me company on lonely drives around the country.

But that doesn’t mean I’m blind to its faults and challenges. Like all forms of entertainment and information, radio is presented with difficult challenges and is branching out and trying to find a new business model that can recapture its glory days. It’s only a matter of time before the transformation that television, newspapers and magazines have gone through comes to radio.

Glittering prizes and endless compromises

The traditional model of radio broadcasters is still going strong, but cracks are starting to show. Clear Channel Outdoor Holdings, Inc. (NYSE:CCO) was bought out by Bain Capital, LLC, and the way it’s emerging from private equity ownership is an unknown. That’s only one company that the casual investor will have heard of, but there are plenty of others.

Entercom Communications Corp. (NYSE:ETM) is representative of the industry. The chain has more than 100 stations in two dozen markets, both major and minor. The problem is that – like most advertising-driven properties these days – it’s not returning a lot for its investors.

The company took it in the neck during the market collapse. Now it’s recovered but somehow never reinstated that $0.10 per share dividend. Note, though, that recovered is a relative term. I’m not a fan of a company with a high P/E ratio (approximately 27.3) and a low return on avg equity (about 4.4%) combined. The share growth is good, but I think the challenge presented by new radio platforms will be a real hurdle. The same applies to others that follow the traditional broadcast model.

From a clear blue sky

The most obvious challenge to traditional radio is satellite radio, of course. Once pushed out by two companies, after a merger only Sirius XM Radio Inc (NASDAQ:SIRI) is still standing.

A long-term bet that’s starting to look shaky, Sirius XM Radio Inc (NASDAQ:SIRI) has a huge market share, lots of subscribers and a troubled future. Having once traded in the $7 range, Sirius XM Radio Inc (NASDAQ:SIRI) dropped as far down as $0.12 per share after the recession hit.