Sirius XM Radio Should Buy Pandora

By Markets Fool.com

Image source: SiriusXM Radio.

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Like folks at a wedding reception clanging champagne glasses with silverware to get the newlyweds to kiss, the din is getting louder forPandora Media (NYSE: P)to get hitched. Corvex -- the activist investor with a 9.99% stake in the leading music streaming service -- has been pushing for Pandora to seek out suitors. It is getting ready to literally raise the stakes, filing with regulators this week to approve the increase of its position to 14.99%.

Corvex, Jim Cramer, and anyone with a soapbox have been trying to play matchmaker. It is usually little more than wishful thinking, but The Wall Street Journal reported last week that Sirius XM Radio (NASDAQ: SIRI) may be on bended knee in pursuit of Pandora. Controlling Sirius XM stakeholder Liberty Media (NASDAQ: LMCA) reportedly offered to acquire Pandora. Liberty Media CEO Greg Maffei's offer to buy the streaming platform for $15 a share was apparently rebuffed, with Pandora seemingly holding out for at least $20 a share before saying yes to the dress.

Now that we have a real name attached to rumored interest, we can begin to wonder how the two would match up. Fellow Fool John-Erik Koslosky doesn't think it's a good idea. He can appreciate the logic behind Sirius XM snapping up an established streaming service with nearly 80 million active listeners, and tacking on Pandora's $1.4 billion in annual revenue won't hurt. However, Koslosky ultimately thinks it would be a big mistake.

Maybe they will grow to love one another

Koslosky's skepticism stems from the mismatch in business models. Pandora relies on advertising for the lion's share of its revenue, and naturally it's premium subscription revenue that fuels Sirius XM's operations. However, isn't that also the beauty of the combination?

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There may not be a lot of overlap between the two groups. The 30.6 million Sirius XM subscribers pay for brand-name content because it's the programming they want to hear in their cars. They would be listening to terrestrial radio, CDs, or firing up smartphone streaming apps if they wanted anything else. The 79.4 million active listeners are largely freeloaders, putting up with ads in exchange for free algorithmically generated play lists.

There is naturally some overlap, but not in the same experience. If a driver was satisfied with Pandora in the car, she wouldn't be paying up for Sirius XM.

This is where the two services -- even if they are kept rightfully distinct -- could help one another. Pandora would be more profitable if it had more than a couple million paying subscribers, and Sirius XM has excelled at getting tens of millions of people to pay for radio that was long considered a free product before satellite radio arrived. Pandora has excelled at getting advertisers to pay up for its streaming ads. Imagine what those same sponsors would be willing to pay to reach Sirius XM's well-to-do audience.

Pandora is ripe for the picking. Its user base growth has stalled over the past year, and its inability to drum up premium subscriptions has weighed on its profit potential. Pandora seems to have hit a wall, and there isn't a shortage of tech giants and music companies that would love to nab the service to make their way to the top of the niche. However, Sirius XM is the one that has a clear path to make Pandora better -- and that's ultimately the best kind of acquisition to make.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.