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.
Shows like House of Cards and the fourth season of Arrested Development are exclusive to Netflix subscribers, and so a service like Amazon.com, Inc. (NASDAQ:AMZN) Prime cannot so easily steal Netflix’s customers.
An analyst at Lazard Capital upgraded Netflix stock a Buy in April with a $325 price target. Lazard believes that, in light of its expanded exclusive offerings, Netflix, Inc. (NASDAQ:NFLX) ought to be viewed more like a TV network.
Too early to doubt Sirius XM
Right now, it’s still too early to call for the death of Sirius XM Radio Inc (NASDAQ:SIRI)’s business model. Although online competitors should pressure the company, exclusive content gives Sirius a moat that can’t be so easily bridged.
In the long-run, Sirius XM could face immense challenges, but while the company continues to add subscribers and generate significant free cash flow, it doesn’t seem wise to bet against it.
Joe Kurtz has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. Salvatore “Sam” is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Sirius XM Is Alright — For Now originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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