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Baker NEW YORK | Thu Jan 10, 2013 2:29pm EST NEW YORK (Reuters) - Sirius XM Radio Inc's grip on drivers is under an increasing threat as the availability of Internet connections in more cars is helping Pandora Media Inc counter some of its rival's big selling points. In a sign of how important drivers are to the two companies, each of their top executives made the trek to Las Vegas this week to court automakers at the annual Consumer Electronics Show. Sirius XM, which has its satellite radios in 70 percent of new vehicles, generates the vast majority of its revenue through subscriptions and derives only a fraction from advertising dollars. Streaming service Pandora is just the opposite, collecting most of its revenue from advertising and operating only a nascent subscription business. Right now, Sirius XM is the much bigger company, with almost 24 million subscribers and more than $3 billion in annual revenue. In the third quarter, it generated average revenue of $12.14 per subscriber. Pandora, by contrast has 60 million users, about 1 million of whom are paid subscribers, and is on track to generate $424 million in revenue this year. But the migration of music audiences to mobile devices threatens to upend a market that Sirius current dominates. The key to both companies' futures rests on winning the battle for the listener on the go, particularly people traveling by car. With its presence in new vehicles, Sirius XM has a first-mover advantage over Pandora. But Pandora is making a huge push to get into the car, a move that dovetails with ubiquitous wireless access that makes it easier to listen to its service. "Internet-enabled radio in the car has already begun," Pandora Chief Executive Officer Joe Kennedy said in an interview. "It will grow as a snowball, initially small but growing exponentially." Sirius XM declined to make its executives available for interviews. Of Pandora's 60 million total listeners, 77 percent have tuned in with a mobile device. The problem is, the revenue per 1,000 listener hours on mobile was only $26.96 in the third quarter, up from $23.60 a year earlier, but still less than half of the $56.40 the company generated from other listeners. "They do have to continue their mobile monetization," said Cowen and Co analyst John Blackledge, who has a "neutral" rating on the stock. Kennedy called the third quarter a "key milestone" since the mobile revenue increase outpaced mobile usage growth. At Sirius XM, executives have said its customers are increasingly listening to its service on mobile devices, but it has never broken out figures on that usage. It costs Sirius XM car subscribers an extra $3.50 a month to stream the service over the Internet on devices. "They don't really promote it, and it's not really a cornerstone of the product," Gabelli & Co analyst Brett Harriss said. Sirius XM Chief Financial Officer David Frear said at an investor conference on Wednesday that the strategy was "to capture you in the car and then allow you to extend to other platforms." DASH FOR THE DASHBOARD While Sirius XM touts the ability of its satellites to deliver a strong signal and high audio quality, the importance of those attributes is likely to fade because of the widespread availability of faster and better Internet connections in cars. "From the consumer standpoint, the reception advantages of satellite radio will be marginalized or go away over time," said a former Sirius XM executive familiar with the business models of the company and its competitors. Indeed, Liberty Media Corp, which ranks as Sirius XM's largest shareholder and is close to gaining operating control of the company, has criticized its former longtime CEO, Mel Karmazin, for not adapting to changing technologies fast enough. Critics say Sirius XM has relied too heavily on its position in the auto market and perceived programming advantage. About 50 million cars in the United States come equipped with the satellite radios, with just under half of their owners actually subscribing to the service. For its part, Pandora is available in just 75 vehicle models, although it also has deals with automakers like General Motors Co, Ford Motor Co, BMW and most recently Chrysler Group LLC that allow drivers to plug in their Pandora-enabled mobile devices and use the car's dashboard to control the service. More than 1 million people have used Pandora's dashboard integration, Pandora said. Sirius XM also believes it has an edge with its programming from the likes of shock jock Howard Stern, talk show host Oprah Winfrey and major sports leagues. Access to this type of content, Sirius contends, justifies the subscription cost of at least $14.49 per month. In the first three quarters of the year, Sirius XM's programming and content costs were $205.2 million, while it paid $409.4 million in revenue sharing and royalties, the company has reported. This represents roughly 25 percent of its revenue in the period. On the other hand, Pandora spends roughly 55 percent its revenue on acquiring music. "Having music is an important thing, but having the diversity of the content, the music, the news, the talk and the entertainment content is really what sets us apart," Sirius XM CFO Frear said at a December 3 investor conference. But as Internet access becomes more readily available in cars, people will be able to listen to podcasts and other content. "The value of commercial-free music on Sirius could decrease," said Gabelli analyst Harriss. "There is no doubt competition from Pandora will increase in the next two or three years." RIHANNA VS. PANDORA Still, Sirius XM has an unlikely ally in its battle with streaming music services: the U.S. government. As it stands, Pandora and other streaming music services pay a much bigger percentage of revenue to license songs than Sirius XM does. Plus, the more popular these services become, the more they have to shell out for music royalties. Based on rules that U.S. lawmakers set under the Digital Millennium Copyright Act, Pandora pays more than 50 percent of its revenue to an agency called SoundExchange to license songs on a per-performance basis. Sirius XM pays 8 percent of its revenue for song licensing, and that will increase to just 11 percent by 2017 under a new deal struck with regulators. Traditional radio pays nothing at all to SoundExchange, although it pays composers to air their music. Pandora and its brethren are pushing for changes in how royalties for online radio are collected and are backing the Internet Radio Fairness Act, a bill that would change regulation of royalties. But they are up against big stars like Billy Joel, Rihanna and Missy Elliott, who are opposed to the bill because they believe their royalties would be cut drastically. "Music is a poisonous area of investment because the royalty structures are so out of whack, it's impossible to be profitable," said David Packman, a veteran of the music industry and partner in venture capital firm Venrock. "We think innovation is seriously depressed in this sector because of the licensing challenges." (Editing by Peter Lauria and Lisa Von Ahn) Investing and Taxes Simplified Tech Media Consumer Electronics Show Related Quotes and News Company Price Related News Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above. 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