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  • KPB & Co Research

Synopsis

The "invasion" of Spotify on US soil has led to number of changes to the music streaming industry as many of the incumbents did not appreciate the level of dominance that Spotify would attain as they built out their empire. Many of the incumbents, particularly the radio stations did not react aggressively as they had significant market shares, market shares that they believe would insulate them from competition. Nevertheless here we are today with most them in bankruptcy court.

The US Radio Market Today

There is no question that the arrival of Spotify and other music streaming services to the US market has been a game changer for the US radio industry. Spotify came to the US in 2011, 4 years after Bain private equity bought iHeartMedia. Since then Spotify has gained market share at the expense of incumbents. iHeartMedia - the largest radio provider - began to experience unexpected declines in revenues. Cumulus media - the second largest radio provider - went into dire financial straights. Even music start-up Pandora began to experience financial stress.

Fast forward to today, and both Cumulus Media, and IHeartMedia are in bankruptcy court seeking to eliminate over US$15Bn in debt cumulatively (iHeartMedia US$10Bn). Pandora, while still alive, is on life support and was given a US$480Mn cash infusion from  SiriusXM - another radio company ultimately owned by John Malone.  John Malone's SiriusXM also emerged as a major debt holder of IHeartMedia and is positioned to become a potential owner as they proposed to take a 40% stake in the company for US$1.16Bn. Recently, John Malone withdrew his offer due to further deterioration in the company's finances. This opened the door for Silver-Lake Partners, which is looking to buy the entire company after it emerges from bankruptcy.  SiriusXM is operating in a space that is not dominated by Spotify. They hold a near monopoly in the car stereos space where most cars come pre-installed with the subscription based SiriusXM satellite radio. This gives the business enormous pricing power and the ability to maintain margins as competition intensifies. 

Final Remarks

The jury is still out on who will eventually have a place in the radio market. Smart phones will increasingly become the primary mode through which audio content​ is delivered to customers. With that said, Apple is moving aggressively to take and maintain market share in light of the threat that Spotify poses to its music purchasing business on iTunes. This makes this space an area that is ripe for further cut-throat competition and consolidation. At this point in time it seems that SiriusXM is the best positioned to become the architect of any radio consolidation.


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