Here's why SiriusXM is purchasing Pandora for $3.5 billion

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Credit: David Paul Morris/Bloomberg

SiriusXM said Monday that it is acquiring Pandora in a $3.5 billion deal that aims to create an all-encompassing digital audio offering that will reach some 100 million users in their vehicles, in homes and on mobile devices.

During a call with investors this morning, Jim Meyer, chief executive at SiriusXM, said many potential new listeners try out the satellite radio service when they get a new or used vehicle, but often do not become paying subscribers.

On that score, the company sees some 23 million trial customers each year, but it only has 36 million paying subscribers. When coupled with Pandora's 70 million monthly active users, however, the company feels it can win even when listeners don't subscribe. The combination will also help Sirius expand beyond an audience that largely listens while driving.

"We would benefit from having a free funnell," Meyer said. "The addition of Pandora will provide diversified revenue streams that will create the world's largest digital audio ad offering … My ultimate thinking in all of this is no matter who comes into our trial funnels, as they exit that trial that somehow, they are in a funnel in which we are monetizing."

Although he didn't mention names, Meyer took clear aim at Spotify: "I'm going to be candid, but I won't mention names: We will take share from a major streaming platform," he said.

Ad tech streams into programmatic

Meyer said the increasing popularity of podcasts was a significant reason for the purchase.

U.S. podcast ad revenue totaled $314 million in 2017, an 86 percent upswing from the previous year, and will grow to nearly $660 million by 2020, the Interactive Advertising Bureau says.

The proliferation of smart speakers and consumer access to mobile devices is also fueling digital audio's overall growth. Digital audio as a whole saw $1.6 billion in ad revenue last year. For contrast, terrestrial radio generated $28 billion during the same time frame, but the format is expected to decline 2 percent this year.

The Pandora purchase will help SiriusXM provide signifcant ad inventory to marketers that are turning to automation for digital audio advertising. Last May, Pandora paid $145 million for AdsWizz, the largest audio ad tech platform, a deal that was likely a key motivator for the move announced Monday by SiriusXM.

AdsWizz let marketers run sequential messaging across multiple formats, meaning advertisers can target listeners through display, then with a related video ad, and then with a digital audio ad. While Spotify's ad inventory was previously available through AdsWizz, Spotify quietly pulled its inventory from the platform in July.

Frank Puma, digital investment lead at Mindshare, says the SiriusXM deal for Pandora will provide marketers another data point to better understand consumers. "If Sirius can leverage Pandora as a platform for distribution, then they've finally found a way to deliver revenue and consumer experiences outside of the car," Puma says. "And, Pandora has already been driving a presence for itself in the auto marketplace. So I'd say it's an important and even necessary move for Sirius to thrive and provide subscriber growth."

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