Can Sirius XM Generate Meaningful Advertising Revenue?

| About: Sirius XM (SIRI)

Many members of the Sirius XM (NASDAQ:SIRI) cult swear by commercial-free radio. I don't think they do so on any moral or philosophical grounds; rather, it's one of the things that keeps their experience with satellite radio "real" and sets it apart from other forms of content delivery. That sentiment aside, just as Pandora (NYSE:P) needs to do a better job of increasing subscriber-related revenue, Sirius XM must get on the stick with regards to advertising dollars.

A quick look at the numbers from Sirius XM's most recent quarterly report supports my contention:

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While Sirius should not abandon its "commercial-free" approach, it cannot grow revenues enough to support massive share price appreciation without a more dynamic and diversified approach. At present, Sirius is, for all intents and purposes, a one-trick pony. The company effectively focuses on subscriptions to generate a lion's share of its sales. Even if SatRad 2.0, an aggressive push to serve America's Latino/Latina market, and robust auto sales were to double the subscriber number overnight, Sirius still needs to focus on developing multiple and meaningful revenue streams. Advertising represents just one possible driver.

If Mel Karmazin decides to go this route -- and I am reasonably certain he will to some extent -- it does not mean the end of the "commercial-free" mantra many SIRI longs and happy subscribers love to hold up. While I think Sirius could do this and not lose a beat, it does not have to sell traditional forms of advertising. The 30- or 60-second commercial spot does not have to be part of the equation. As a former terrestrial radio salesman, Karmazin knows a ton more than I do about selling radio ads creatively. I am just surprised he has yet to get around to making it a priority. Or maybe he has.

I can tell you from my days on terrestrial radio that sales departments actually do a pretty good job of selling what I will just call non-traditional advertising. It's not the sales department's fault that much of the programming it needs to sell stinks.

I listen to Sirius all day long. I spend most of my time with E Street Radio, therefore I will use it as my main foil. From time to time, I listen to other stations such as Sirius XM Hits 1. Each station on Sirius's channel lineup has the potential to generate significant advertising revenues.

First, I'll discuss how these revenues could come to be. Then, I'll get into what might be keeping it from happening. Finally, I relate this issue to my investment thesis for SIRI.

It's pretty simple. Sirius does not need to sell spots; rather, it can offer sponsorships to advertisers on one or more stations. These could come in the form of national advertising agency buys or standalone deals. As I listen to E Street Radio, I see the opportunities all day long. Like most Sirius stations, E Street Radio has a fair bit of feature programming, ranging from a weekly talk show with Bruce Springsteen chronicler Dave Marsh to a celebrity guest DJ segment. There's no reason in the world why segments like this cannot be "brought to you by so-and-so."

By a similar token, when the big, booming voice tells you that you are listening to "E Street Radio" or "Sirius XM Hits 1," it would not hurt anybody's ears to hear a "Brought to you by Valvoline" thrown in. If Sirius really wants to push the envelope, it could get its personalities to do live on-air endorsements. If done well, these "commercials" can often be as entertaining as any other content a station offers. If nothing else, Sirius needs to get its personalities out there.

When I did terrestrial radio, one of my favorite and most lucrative things to do was what the stations I worked for called "roadshows" or "remotes." It simply means taking the show on the road. At the national scale this becomes more challenging, and possibly more expensive, for Sirius, but there's no reason not to take some personalities out of the studio and bring them to key markets for a week at a time to do shows and create a scene at an advertiser's place of business.

If I recall correctly, Sirius has at least scratched the surface in these regards, at least on its talk stations. It's all pretty simple in theory. In practice, it might be a tough sell for the company.

While Sirius can tout 20 million-plus subscribers to prospective advertisers, I am not so sure how the company can translate that into a formal notion of "ratings." I am sure that Sirius has some internal measure of who listens to what, when, and for how long, but I have yet to see it made available to the public. I wonder how many people actually listen to its music stations at a given time? I would not be shocked if the numbers Sirius could show to advertisers in this regard are less than impressive.

Out of 20 million subscribers, it's probably unreasonable to believe that 10 percent of that number -- 2 million -- listen to E Street Radio, Sirius XM Hits 1, or another music station at a given time and for long enough to make it worthwhile to a national sponsor to plop down meaningful cash for a sponsorship. Using this logic, the network programming terrestrial radio offers should continue to blow away Sirius in a competition for advertising dollars. This might be precisely why Sirius does not target this approach -- it simply cannot sell it. Of course, it could always sell across its entire platform, but I'm not sure that's a realistic expectation
or that it would convince large national buyers.

Even where it can probably claim a sizable and loyal audience -- like for Howard Stern's show -- I bet it's still a tough sell. Just listen to the ads that run on Stern's show. They must make Stern long for the K-Rock days, at least in some fashion. He's never attracted Disney (NYSE:DIS) as a partner, but it's been a whole lot better than it is now. As I think about the subscription model effectively making it impossible, or at least difficult, to produce substantial advertising dollars, I worry, just a little bit, about being long.

Ways still exist, however, to generate ad revenue. I think SatRad 2.0 could open the door to potentially lucrative, targeted advertising. High-end companies -- luxury car makers are a good example -- don't necessarily need to know that you have a large audience; instead they want to make sure you have their key demos hooked, particularly affluent middle-aged men. And with SatRad 2.0, Sirius can focus advertising to these listeners not only on the air, but through whatever interactive and "social" functionalities the next step in satellite radio might bring.

A commenter on a recent Seeking Alpha article noted that he wants to see Sirius move to a model where it gives satellite radio receivers away for free (or cheap) like cellular companies do. I could not agree more. It would be one heck of a way to introduce SatRad 2.0 into the marketplace. And it would be a great way to work large-scale sponsorships into the mix going forward. The sponsor becomes part of a major national sales and marketing pushing, thus it gets meaningful exposure, and it could benefit from the significant increase in subscribers SatRad 2.0 should bring to Sirius. Plus, Sirius could use the revenue to help subsidize free or low-cost receivers not simply for the car, but primarily for the home and on-the-go -- two areas in need of a breath of life.

In any case, advertising is both a challenge for Sirius and a necessary evil. If Karmazin -- a sharp and creative man with skins on the wall in radio sales -- was not running the ship, I might be more concerned than I am about what I perceive to be a bit of a conundrum inherent in the subscription-based business model.

Disclosure: I am long SIRI.

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