Rob Black's Media Stock Report

 |  Includes: MSFT, SIRI
by: Rob Black

Sirius Satellite (NASDAQ:SIRI) reduced year-end sub guidance to 5.9-6.1 million from 6.3 million previously citing weaker than expected retail sales since Thanksgiving. This implies net adds of 780k-980k in 4th quarter 2006 compared to 1.1 million in the year-ago period, most of which are primarily expected from the retail and aftermarket.

Our channel checks during the past 8 weeks have suggested that the retail environment remains weak. Sirius reiterated its FCF guidance for 4th quarter 2006, and continues to expect its first quarter with positive FCF could be as early as 4th quarter 2006. The company has maintained for some time now that they will remain disciplined in acquiring subs during the quarter, and would strive to achieve the FCF objectives they had previously outlined.

Microsoft’s (NASDAQ:MSFT) President of its Entertainment and Devices Business, Robert Bach discussed Microsoft’s efforts to build a world class consumer business (beyond Windows and Office), as it creates a connective entertainment platform for the consumer, pushes toward incremental profits, and provides an offset to major rivals in specific markets. Microsoft expects this division to turn profitable for the year in fiscal 2007, which would require a $1.3 billion improvement in the P&L. The company first expects the Xbox business to turn profitable, then will focus on Zune, while the Mobile & Embedded and Consumer Products businesses are already profitable.

Xbox. The Xbox is likely benefiting from production problems experienced at SONY with the PS3, which may help Microsoft to reach its target to ship 10 million Xbox 360 units by the end of the calendar year. Mr. Bach noted that he has heard nothing but positive things from retailers, though other industry participants had anticipated even stronger Xbox 360 sales in the face of SONY’s issues. He also expects January could be a good month, as gift card holders make Xbox related purchases. Mr. Bach noted that the peripherals portion of this business has exceeded expectations. The attach rate for peripherals has been greater than 3 per console, and the games attach rate is greater than 5 per console at this time – both of these numbers are strong given historical averages at this early stage of the platform lifecycle.

Zune. Zune was the largest retail launch in Microsoft’s history with more than 2 million songs now available for download. Microsoft believes that there is opportunity in this market to provide an alternative to the Apple iPod, and it appears that Zune has already become the leading option. The technology requirements for this business are much less than for Xbox, and Zune provides another component in the eco-system business of the connective entertainment platform for the consumer. Microsoft believes this market is early in its lifecycle and that the audience could be much larger than it already is.

Mobile and Embedded. Microsoft expects this business to improve on its marginal profitability from last year as the number devices that runs Microsoft software increases.

IPTV. Microsoft was early in entering this market, which has resulted in undesirable return on investments, but this is an example that may provide opportunities as the market develops, or at least options for Microsoft.