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How Apple Will Force Sirius to Face the Music

When Pandora released its audience metrics for March, it showed the company's share of total U.S. radio listening grew 13% year over year to 9.11%. Last year, Pandora had 8.05% share. While reporting that it had 75.3 million active listeners, Pandora also achieved a landmark of 250 million registered users in the U.S.

Pandora's music genome platform, which gives listeners the ability to customize their music, has helped turned Pandora into a sticky service. This means that Americans love their jukebox. The problem is Pandora doesn't know how to make money. The more it grows in popularity, the more money it has to shell out in royalties.

Likewise, Sirius' main issue is that its business model is too closely tethered to auto sales. By contrast, Pandora's personalized music service can be accessed from a variety of ways, including tablets, PCs, smartphones and most car audio systems -- pretty much, anything with an internet connection. But Pandora also has a growing subscription service and the ability to grow advertising revenue.

As royalty fees continued to chew through the company's bottom line, Pandora hopes to mitigate this by raising the subscription service. The other potential growth area is advertising. Advertising revenue can become that dominant second stream of revenue Sirius lacks. Sirius has also talked about the connected car.

Its acquisition of Agero has excited investors. But Sirius is a radio/entertainment company. I don't see how Sirius can out-innovate Apple or Google (GOOG) in an area where technological advantages are required. Not to mention expensive capital investments. Sirius will not outspend Apple or Google.

But if it does buy Pandora, Sirius will raise its own acquisition profile. Its entertainment offerings immediately become more attractive. It's not out of the question that Microsoft (MSFT) would become interested. And with Pandora stock in a freefall, now is the time for Sirius to face the music and make the deal.

At the time of publication the author had a position in AAPL.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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