Commercials on Sirius XM: Benefit vs. Backlash

Over the years, I have seen many ideas brought to the table regarding satellite radio. Some are business friendly, others are consumer friendly. One idea that has been bandied about a few times over is the idea of having national sponsors for channels.

The concept seems sound, but there are many variables to consider. Would a channel named Pepsi (PEP) infringe on the consumer perception that satellite radio is commercial free? Technically, station bumpers (the voice-over that tells you that you are listening to Sirius XM (SIRI)) and DJ chatter involving information about the BEST OF service, the family plan, etc. are not considered commercials, but do too much of this, and consumers may feel that the promise of commercial free is not being met.

For many, and in particular the investors, the idea of channel sponsorship is not terribly infringing. Some say that the “ad” can simply be displayed on the screen, rather than spoken. There has to be some value in this concept, right?

While I have not seen the music channels employ some of the philosophies, I have seen an entire hour of a Stern replay with an ad on my Stiletto. But there are 69 channels of music that could have a sponsor. Why not do it?

The answer may be as simple as supply and demand. There is an abundant supply of ad space, and demand is on the downside. Advertisers across the media spectrum are cutting back on expenses, and this would also impact satellite radio. Sirius XM still has ad space available on non-music channels. How prudent would it be to implement station sponsorships when there is still advertising real estate elsewhere within the service?

Another issue may be that a channel sponsor would want a certain level of control. Pepsi has had their issues using certain singers in their ads. In fact, they have suffered boycotts. What if Pepsi demanded certain language standards? What if they did not want to allow certain artists or songs to be on a channel they are sponsoring?

Consumer backlash may be another reason the company has not taken this step. With the recent channel shuffle, there were numerouscomplaints. Even with the existence of a similar channel, people were irked at the loss of their favorite. We already see the four Clear Channel (CCO) stations on the XM dial relegated to second class citizen status because they have commercials. Would sponsored channels suffer the same fate? Commercial free music is one of the sole differentiators between terrestrial radio and satellite. if you remove that separation, people may begin to wonder why they need satellite radio.

All of that being said, if the dollars are right, this is an option that the company needs to consider. A lot of careful consideration needs to go into the process though. While every million dollars counts, the benefit vs. the backlash must be weighed.

Should the company explore the idea of sponsored channels? Sure. They already have over the years. XM’s original business model involved commercials. Their initial sales pitch to OEMs was that they would share a bigger piece of the subscription revenue pie than Sirius because they would make up the difference in ad dollars. The ad dollars never rolled in, and ultimately, XM switched to a commercial free format. It could be argued that there was not the critical mass of subscribers at that point that exists today, and likely that thought needs consideration, but is now the time to make the move?

Some feel that with the current situation, the company needs to make bold moves. Still others feel that the merger was too bold a move, and there has been enough change. Early on, Mel Karmazin wanted advertising to make up 10% of revenue. Thus far, the company has never reached that goal. In the current economic conditions, and with ad sales down across the media landscape, perhaps now is not the time to dilute the market further.

The national sponsorship idea has merit, but implementation of it does carry risks. Without having the ability to see the sales stats, it is hard for any investor to grasp the benefit vs. the impact, but rest assured, this concept has been on the radar screen for quite some time. While we may not know the exact reason it has not been done, we can can put forth some educated guesses.

At this point I feel there is plenty of ad space to sell on Sirius XM without impacting the music channels. Only after all of those ad slots are performing as needed should the advertising supply pool be increased. That’s my opinion on the matter. What is yours?

Position: Long Sirius XM

Comments

[163888:]

Killerkaul, Mr Stupid was right about the turkey thing, it gives them major gas were they will not eat or drink anything for days. I found out the hard way a few years back, I got so worried had to take her to a vet. I dont think a few scraps will hurt just not to much.

2008 Nov 29 08:12 AM

[163888:]

P.S. to the rest almost through the tuff times. Wait till people here about how much FCF they are going to have. I believe we should here something on that on Dec. 18th, like Mel said before when he came out and said 4th Q 2007 was going to be a great deal more then 4th Q 2006, well before the release of numbers. I myself think that will be the catalist for a upturn in PPS, because people cant at that time use Feb. or May dept as a reason anymore. Or at least it would make no sense When they can show that they are going to have enough COH to take both of them out. Then again nothing on the PPS of this stock has made much sense.

2008 Nov 29 08:27 AM

[killerkaul:]

163888............ Thanks for the advice on the turkey for the dogs. Was unaware of the problem. ... your buddy killer.

2008 Nov 30 11:45 AM

[I'm Not Jim...:]

Watching the Giants Redskins game, and saw a commercial for the Dodge Ram truck. Hmmmm, advertising wi-fi connectivity, but not Sirius. Ladies and gentlemen, that's the wave of the future. Wifi, not sat rad. If we can get out whole, that would be great, but 5 years from now, there won't be any Sirius.

2008 Nov 30 03:49 PM

[Konsta:]

IMNJC, you may or may not have a point, while it is true that wifi is spreading, and some cities, such as Cerritos and I believe San Francisco, have complete WIFI coverage, WIFI is by no means everywhere.

Satellite radio's advantage is that it IS everywhere. As you are driving, especially on a longer road trip through perhaps remote areas, you don't want to lose your reception. This is the nice thing about satellites. They need to deliver more video and monetize the size of their audience though unobtrusive channel or time sponsorships.

2008 Nov 30 05:57 PM

[Neal Barkett:]

Tyler, Music compared to talk radio, as far as advertisers r concerned. Are we comparing apples to oranges? I know Xm has a few music channels w/ commercials, which are not doing well. But I hope Sirius Xm would look at sponsorship from a differant perspective so at least keeping an open mind that they r 2 very differant approaches. Commercials r cumbersome and a show stopper. While sponsorships flow with the programming. I think they would be well served to at least keep it in on the table as an option. Talk formats are a totally diff. format from music and should be looked from a whole diff. perspective.

2008 Dec 01 09:02 AM

[rtatp31:]

what if this.... what if that..this is BS.. Sirius needs to get some refinancing done before 12/18 thats the bottom line.. if not we are looking at further dilution, reverse splits etc...Quit speculating on what might happen if...

2008 Dec 01 10:16 AM

[learn to think:]

I was just checking out another stock, JOEZ and for us bloggers who have been on SIRI's blogs for months (or even years) it might be entertaining to read some of their posts. I bet you will have deja-vu...lol

2008 Dec 01 10:18 AM

[shure46:]

IMHO - I believe the RS and issuance of more shares will pass ( should be interesting if it doesn't though ) ..... I think Mel and the banks have already decided they would rather the public take on the risk ...... I sort of doubt any kind of bank financing other than another share offering is being seriously considered ............ There is too much uncertainty , and I think any kind of conventional loan is probably not even an option ...... banks don't like to gamble with a billion dollars long term , if there is a way to gamble with our money short term , they would rather go that route ........ but you know , they might have a problem with that too .... will there actually be buyers for more siri stock after this debacle ????????

2008 Dec 01 12:02 PM

[shure46:]

IMHO ---- Of course when the new shares are offered , Siri will be the darling of wall street

2008 Dec 01 12:06 PM

[GoToDrew:]

Although I am not really into conspiracies, SiriusXM has me suspicious. I think there has been a lot of negative propaganda surrounding them to drive down the stock price. Between that and the merger the stage is set for somebody to make some really big moves. I just keep waiting to see what the catalyst is for their apparent turn around. Is it a some big advertisers hoping on board? Good question. I don't know but I expect some big news to effect SIRI in a very good way over the next 2 1/2 weeks. Keep an eye on them.

2008 Dec 01 02:08 PM

[FoolNHisMoney:]

IMO there will be no such good news before the sharholder's meeting. What would be the incentive? Announcing a financing deal on the outstanding debt now would be a sure way to kill the RS and share authorization . . . which they will want to have in hand as that stock is not likely to go above $1 (or much higher than that if it does somehow make it up to a buck) any time soon, as long as delisting is still a concern.

2008 Dec 01 02:16 PM

[FoolNHisMoney:]

Wow, I just realized how poorly that last sentence reads. What I what trying to get across is that they will want the RS option in had as long as delisting is a concern regardless of the likelihood of a grace period extension.

2008 Dec 01 03:23 PM

[cos1000:]

FoolNHis$

3 times are a charm.... LOL

Shure46

I agree with you that the RS and share dilution are going to be a done deal at the annual meeting. I still think that shareholders will be surprised when the final financing arrangement is announced. Shares as warrants against the risk, say B preferred standing in front of the common on a default, are still attractive to a bank with a good payer as Sirius Xm has been. Cash on hand to pay of the remaining Feb 09 is very possible and a new Bank deal on the May debt is a reasonable expectation with more strings, such as the warrants, and a higher rate. To burn the shorts this could be announced after the meeting and RS and Dilution approvals.... Wouldn't that shake things up??

It is still completely possible that Mel will not issue most of these newly authorized shares. The incredible dilution authorized could be necessary to facilitate the split, even if the reverse was a 1 for 20 resulting in 400 M authorized and 175 M issued as the company is now configured. If the Feb and May 09 debt is taken care of without issuing new Convertible Bonds and instead announce using the COH to take out the Feb debt, I think the stock price would go to .6 to .9 / share on the announcement. Now, if additionally they pre announce good FCF in the 4Q, the stock could easily go back over a buck before any RS would even take place. So much for my Christmas wish......LOL

2008 Dec 01 05:58 PM

[mlongj:]

cos1000

I think your right on the timing of announcing the feb debt being resolved. And yes, that would certainly shake things up considerably. I also feel that the shares will be authorized, but I am not so sure they will all be issued. With each passing day, bankruptcy talk is ending and brighter days are certainly ahead. After all, it really can't get much worse.

By the way, your insight is quite remarkable and appreciated. I enjoy the objectivity that you employ on your posts.

Long Sirius

2008 Dec 01 06:15 PM

[cos1000:]

mlongj

you are too kind...... and thanks...

2008 Dec 01 06:56 PM

[FoolNHisMoney:]

Yikes, my re-write was as bad as the first. I blame my public school education!

To be clear, I'm not saying that I don't believe there will be refinancing deal, and possibly well before February at that . . . I just don't think it will be announced before the shareholder meeting. I of course hope I'm wrong.

2008 Dec 01 07:30 PM

[cos1000:]

FoolNHis$

I hope your laughing when you say that...... about Public Schools that is.

2008 Dec 01 09:00 PM

[davefromber...:]

You've got to be kidding me! Mel needs to pull his head out of his you-know-what!! PAY for a subscription to advertising? I don't THINK so. I don't pay $12/month for HBO to watch no stinkin' commercials. And, I don't pay a monthly XM sub to listen to them either.

A long time ago, I read some suggestions on-line for how the sat-rad model might be improved. Recently, there have been many more of these. Lots of people writing with lots of good, free ideas, but Ol' Mel ain't listening. How about "advertising" your OWN product, Mel, and not other peoples' products? Now, there's an idea! How about free streaming internet of a handful of stations WITH commercials to get people introduced to the (formerly) high quality line-up of sat-rad?

If you can't tell, I'm a "former" XM subscriber (now a "Sirius-XM subscriber", not by choice) who's not too pleased about the way the XM line-up was DECIMATED.

2008 Dec 01 09:55 PM

[thebigdig:]

I would say if they have enough chanel space give the subscribers a choice. By offering some commercials at 5 dollars a month or less. Than offer commercial free channel plus the comercial channels at the 12 dollars per month. See which gets the better response or just keep doing both. I know as a consumer I like choices. They could do like cable and give free weekends of certain commercial free channels to get people to spend more if thy like it. I have had sirius and currently have xm. I will not listen to local radio just due to the fact even with the commercials that are there, there is still tons more music and the commercials they do have are very short.

2008 Dec 02 03:04 PM