KEY POINTS
- SIRI offers few details on its plans for P: SIRI mgmt suggested its priority for P post-close would be growth rather than improving P's profitability, but also suggested that it will still manage the combined company to EBITDA. SIRI currently isn't planning on any specific cost synergies, and outside of potential cross-promotional opportunities, mgmt offered no real details on its strategy for the combined entity moving forward. The impetus behind the acquisition - outside of taking out what we see as SIRI's most credible threat - appears to be using P's ad-supported model to monetize SIRI's slippage (non-converting trials and churn), with SIRI conceding that the majority of its trial activity historically does not convert to paid subs.
- But SIRI could make it work: One reason why P's ad supported model never worked is because it's much easier for users to avoid ads (use multiple services) outside the car. The reason why terrestrial radio can get away with +10 minutes of ads/hour is because it's a lot harder for users to do so behind the wheel with a user interface that has relatively less functionality. For context, P started experiencing ad-supported user declines at less than 3 minutes/ads per hour. That said, SIRI has a lot of runway for ad load if it can increase P adoption in the car. However, doing so would be expensive given the increased radio consumption that occurs in the car. While SIRI could conceivably change P's transmission from internet to satellite delivery, we're not sure the regulatory framework would allow SIRI to maintain P's semi-interactive functionality under the lower statutory rates for satellite radio. Further attempting to do so may draw the ire of the Labels, which could jeopardize P's ability to offer an interactive service (i.e. Pandora Premium). That said, we suspect SIRI would have to make a hard push into Local Radio Advertising (higher priced ad units) if it hopes drive profitability. Then again, it could just ramp up ad load closer to terrestrial radio levels, which could also wind up improving conversion on the combined SIRI/P subscription offering. Naturally that would come with an escalating level of ad-supported churn, but after nearly 20 years of negative cash flow due to P's inability to monetize its unchecked music consumption, that may be the preferred route at this point.
Let us know if you have any questions or would like to discuss further.
