How Drake, U2 Deals Could Benefit SiriusXM, Pandora

The Drake partnership is just one of the ways the SiriusXM-Pandora merger could pay off — in addition to a Pandora-branded channel on SiriusXM and news and non-music content from the satellite radio giant now available to Pandora users, reports Billboard.

The combined company's new reach makes it an ideal partner, too: In December it announced a deal with U2 for U2X RADIO on SiriusXM; an agreement with basketball star LeBron James' media company to create exclusive content; and a multiyear venture with Marvel Comics to create original series. Programming from all three will be available on both platforms.

Pandora also poses a challenge for its new parent: It lost 5.1 million free listeners over the last four quarters, and as Spotify, YouTube and Amazon pour resources into new products and features, its funnel of free users that can be converted into paid subscribers is shrinking. There's no guarantee that Drake and U2 can stop the listener exodus.

Given what's known about streaming economics, satellite radio is probably more profitable than the entire music streaming business.

Jim Meyer

There are stark differences between SiriusXM and Spotify, a streaming-only company that has far surpassed Pandora's listenership. The two companies had about the same third-quarter revenue ($2 billion for SiriusXM, $1.9 billion for Spotify), but SiriusXM has enviable margins: Spotify keeps about 30% of its revenue and pays the rest to rights holders; after paying royalties and programming costs, SiriusXM keeps 70%. Even with the addition of Pandora's weaker financial standing, the satellite radio-based model has better margins and turns a net profit.

The two platforms don't overlap, but SiriusXM has said cost synergies will reach $75 million annually by the end of 2019, 50% more than the $50 million estimated when the merger was announced. But the tantalizing benefit is the addition of a free service to a paid one and vice versa.

CEO Jim Meyer describes the hybrid company as a "funnel" in which Pandora's free listeners at SiriusXM are drawn to become satellite radio subscribers — i.e., the freemium model. "As we get people into that free funnel, you can expect we will promote the value of our subscription," he said during the earnings call. The funnel is a financially attractive tool. Marketing to existing listeners is practically free for a company that spent $118.4 million to acquire satellite radio customers in 2018.

Aside from the financial benefits, there are the optics: Size definitely matters in the music business.

"Music superstars continue to acknowledge the power of our platform, and in a competitive audio world that matters," said Meyer on a recent call with analysts.  With Pandora, SiriusXM has a safety net for catching lapsed satellite subscribers. "Our goal should be to never lose a listener," said Meyer. So, rather than lose a satellite subscriber or free trial user, SiriusXM can guide people to ad-supported Pandora.