XM & Sirius Satellite Radio: Paying Subscribers Needed

Aug.15.06 | About: Sirius XM (SIRI)

Rob Zenilman submits: In today's Wall Street Journal, Sarah McBride's Low Fidelity - Until Recently Full of Promise, Satellite Radio Runs Into Static raises serious concerns about the long term viability of satellite radio.

A few years ago XM (XMSR) and Sirius (NASDAQ:SIRI) predicted that they would reach break even when they reached 4 million subscribers. The subscribers have come, yet the losses are still mounting.

And are the subscribers really there? Aside from installing the radios in their cars, automakers have been giving free trial subscriptions to buyers. GM offers a 3 month XM trial, Chrysler offers 1 year of free Sirius and some Ford models come with 3 years of free Sirius. Analysts are concerned with what happens when these free trial periods run out.

That's just the revenue side. Competition for content has both companies spending heavily. Sirius paid $220mm for a 7 year NFL contract and $500mm for 5 years of Howard Stern. XM spent $650mm for an 11 year contract with Major League Baseball, and $163.3mm last year on advertising and marketing - double that of the prior year.

Comment: Two movies come to mind:

  • In Field of Dreams, Kevin Costner's character hears "If you build it, they will come". Well, the satellites are built - will paying subscribers come?
  • In Other People's Money, Lawrence Garfield (Danny DeVito) asks "you know, at one time there must've been dozens of companies making buggy whips. And I'll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company?". Satellite radio is great technology, but is that enough?
With losses mounting, can subscriber growth be enough to save satellite radio? Or will they have to start playing more commercials? Or, will people simply plug their iPods into their car stereos?

Interestingly enough, there are similar viability concerns rising with satellite TV. DIRECTV's (DTV) joint bid with EchoStar (NASDAQ:DISH) for AWS spectrum has rekindled rumors about a merger between the two companies. Like their radio counterparts, satellite TV providers are facing increasing competition: Cable companies are now offering "triple play" packages, combining TV, internet and phone services. Local telcos, which already provide phone and internet, will soon be able to provide video via IPTV technology. EchoStar and DIRECTV can only provide one service (without video-on-demand) and have the expense of launching high cost satellites .
This is getting interesting.

See: Second quarter earnings conference calls for XM and Sirius.