Sirius XM (SIRI), the merged satellite radio company which provides commercial free, subscriber-based radio services for the United States and Canada with a customer base of 19.5 million subscribers, faces several threats to its business, which picked up considerably in the past two years, from teetering on the brink of bankruptcy in early 2009, when its stock traded for a dime a share, to its current, more stable $1 stock price. Even though at this level, the stock has a shocking 104.88 Price to Book ratio, the company’s financials seem to have stabilized, reporting a profit consecutively for the past three quarters. Last year in the same period, the company reported a loss of $342.8 million, spending $370.5 million on programming costs. Those flopping margins convinced many to dump their stock in what was once hailed as the next promising media industry, which had once traded a decade ago in the lower $60s. Now, with the advent of broadband mobile technologies and free alternatives, can Sirius XM finally convince the public that the promises it made 16 years ago are still possible today, in a vastly different tech and media landscape?
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In early August, Sirius XM reported net income of $15.3 million, up from the loss of $159.6 million a year ago. Revenue increased 16% to $699.7 million, edging out the Wall Street consensus of $691.4 million. Free cash flow increased to $108.3 million, up from $12.7 million the previous year. Sirius’ current 19.5 million listeners includes a net increase of 583,000 new subscribers, a gain of 6% and a record high for the company. Account deactivations decreased by 8%. The company hopes to add 1.1 million subscribers this fiscal year, and in 2011 it expects to add another 1.4 million. These are lofty numbers that if attained would definitely show a turnaround for the embattled company, but are these achievable in the face of new techs and a fickle customer base?
The most recent news regarding Sirius XM is the impending departure of shock jock Howard Stern, who signed an exclusive, five-year $500 million contract with the company back in 2006. Stern has stated that he plans to part ways with Sirius XM, and it is unlikely that the company will renegotiate the terms of his salary, which has accounted for over a quarter of the company’s overall yearly programming expenses. He has been credited for attracting over 2 million listeners to satellite radio four years ago, and analysts have noted that up to 300,000 fans may deactivate their service if Stern leaves. However, at current numbers nearly 20 million, Stern’s departure would actually have little impact on the company’s bottom line, instead adding unnecessary expenses to its already delicate net margins of 2.18%. Sirius has other exclusive content providers lined up besides Stern, including the NFL, MLB, NCAA, Nascar, Martha Stewart and Oprah.
Facing upcoming 4G mobile Internet networks combined with free streaming services, portable built in media players in cars, and of course an upgraded FM radio known as digital HD radio, does satellite radio truly have a future outside its decidedly geeky tech niche? Firstly, Wall Street has pegged the company’s present and future value on auto sales. It’s net gain of 1.1 million subscribers over the previous year has been heavily based on factory-installed satellite radios in brand new cars from its myriad of partners, including Toyota (TM: Charts, News, Offers), GM, Kia, Mercedes Benz, Aston Martin, Audi and many others. Yet these new subscribers have the option to cancel their satellite radio if they find that normal FM or their iPods suit them just fine, though numbers suggest that few are canceling their accounts. In addition, new, freely available digital radio stations, known as HD radio which has been optionally installed in automobiles starting in 2008, will soon become a threat, as over 1,500 radio stations currently broadcast digitally, with many more to follow.
On the retail level, regarding consumers actually buying aftermarket satellite radio receivers, the numbers keep dropping, which tell us that the general public is hardly excited about satellite radio. If auto sales remain inconsistent, as they have in recent quarters, Sirius XM stands to suffer as their pool of new customers dries up. However, if auto sales pick up, Sirius stands to gain substantially, at least in the short run, as customers are force fed their product. Another threat is the advancement of smartphones and their streaming capabilities, and the automakers’ rapid adaptation of adapters for them. Current generation 3G smartphones and upcoming 4G ones, such as the iPhone and Android handsets, are more than capable of streaming free Internet radio from a wide variety of commercial free sites. These huge directories, such as SHOUTCast, have a huge variety of browseable genres and artists that dwarfs Sirius XM’s comparatively limited selection. In addition, Internet radio has a global reach that far exceeds Sirius XM’s satellite range, which currently is only available in the United States and Canada.
Recognizing this threat, Sirius XM launched applications for the iPhone, Blackberry and Android, hoping to tap into the satellite connection abilities of the phones to bring in new subscribers who have avoided satellite radio in the past due to the necessity of installing a new receiver. In addition, Sirius XM offers a paid Internet radio option which offers its premium programs for a 12.95 per month subscription, which has yet to pick up traction with computer users, who are used to the freely available content from Last.FM, SHOUTCast, or local radio stations’ websites.
In this respect, it seems like Sirius XM has gone from being the pinnacle of new technology during its IPO days to an industry laggard which has had to craft new hooks to remain relevant. However, Sirius XM may also be shrewd to focus solely on the United States and Canada, where wireless penetration has failed to reach large areas of the countries. In these areas, and with a roaming public that relies heavily on long distance road travel, satellite radio may be an extremely attractive alternative to lost and broken signals.
Other News About SIRI
SIRIUS XM Launches SIRIUS XM College Sports Nation – Sirius boosts its college sports lineup.
Analysts say Sirius XM may do better without Howard Stern – Doing the math on Stern.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
