As part of its iOS 7 unveiling, Apple Inc. (NASDAQ:AAPL) announced that owners of particular automobiles would soon be able to beam a version of their iPhone’s interface directly to their vehicle’s touch-screen.
This feature, combined with Apple’s upcoming iTunes Radio, has left some assuming the worse for Sirius XM Radio Inc (NASDAQ:SIRI). Shares closed the week down over 5%.
While I agree that Sirius XM could be challenged over the very long-term, the company has a number of unique value-adds that should prevent it from been pressured anytime soon.
The Sirius business
Sirius XM Radio Inc (NASDAQ:SIRI) offers a premium radio service. For a monthly subscription fee, users get Sirius’ exclusive channels in their car. These channels are often higher quality than their free FM counterparts, and thus Sirius is able to keep a base of loyal subscribers.
Last quarter, the company reported that it had 24.4 million subscribers, its most ever. The ongoing recovery in the US auto market may be benefitting Sirius, as it has a deal in place with most major automakers — Sirius is often included free for a limited time with new car purchases (and even some used).
Moreover, Sirius XM Radio Inc (NASDAQ:SIRI) is a veritable cash machine. Last quarter, it generated $142 million worth of free cash flow. While it doesn’t pay a dividend, it has been committed to a large share repurchase program.
The Sirius XM bear case
But there’s an obvious problem with this business in the long-run. Increasingly, consumers are opting for Internet alternatives like Pandora Media Inc (NYSE:P), and once it’s released to the general public, iTunes Radio.
Further, the audio systems available in new vehicles allow users to control these services directly through their vehicles’ controls.
If a driver has a service like Pandora Media Inc (NYSE:P) or iTunes Radio running through their vehicle’s speakers, why do they need a Sirius XM Radio Inc (NASDAQ:SIRI) subscription?
Exclusive content creates a moat
In the very long-run, Internet alternatives could doom Sirius XM. However, the company is somewhat insulated by its exclusive content — it isn’t just music.
Besides Howard Stern, Sirius XM Radio Inc (NASDAQ:SIRI) has numerous channels dedicated to political talk shows and sports (both sports talk and live games). As of right now, the online services are sorely lacking in these categories.
That isn’t to say that they’ll never expand into them, but they might not, simply because they aren’t particularly incentivized to do so. I would be shocked if, for example, Apple Inc. (NASDAQ:AAPL) went through the trouble of adding talk shows to iTunes Radio.
It just doesn’t accomplish Apple’s true goals with the service — selling more music. With iTunes Radio, Apple wants people to discover new music that they can then purchase. Sirius XM Radio Inc (NASDAQ:SIRI), on the other hand, wants to keep people paying a monthly subscription fee.
An interesting analogy is Netflix, Inc. (NASDAQ:NFLX). The company has seen the rise of numerous competitors in recent months, such as Amazon.com, Inc. (NASDAQ:AMZN) Prime and RedBox Instant. However, Netflix has proactively moved to fend off its competition by creating exclusive content.