CRAZY IDEA WITH CRAZY UPSIDE
Let's get this out of the way. We know this is an improbable buyout suggestion, but we think it is important to think outside of normal boundaries to arrive at the best ideas. But however unlikely, there are valid reasons to like this possibility. In a best case scenario, considering the valuations assigned to peer social media companies, this acquisition could more than double Sirius XM Radio's stock price.
WHY THE NEED?
We are bullish of Sirius, so much so that we previously listed SIRI among "5 Stocks That Could Double in Price." But like any business Sirius XM faces tremendous competitive pressures. Not only do they face an uphill battle competing against free terrestrial radio service providers like Cumulus Media (NASDAQ:CMLS) and Westwood One (NASDAQ:WWON), they are also under pressure from free Internet radio providers like Pandora Media (NYSE:P). Instead of charging upfront subscription fees, these competitors make money through advertising revenues.
The advertising market in terrestrial radio is a mature business but the Internet based market, especially through mobile devices, is still developing. While the mobile advertising market may never fulfill its tremendous potential, the future is uncertain and as such we think Sirius XM would be wise to expand into this area to compliment their current business model. In addition, by allowing competitors like Pandora to continue growing in their respective niches, Sirius XM could one day find itself competing head to head with Pandora or other companies when they SIRI has less flexibility to respond. This is the time to be opportunistic.
DISRUPTIVE MOVE WITH HUGE OPPORTUNITY
Any mention of MySpace.com will likely be met with discussion of its diminished status. Some may even be surprised that the company still exists. But for all of MySpace.com's negative perceptions as a has-been technology website, casual market watchers may be surprised that the website had 63 million registered users as of February 2011. The company has dramatically lost users and the users they do have tend to sign in less often and stay signed in for shorter periods of time, but still, there is significant value in a user base of that size. In addition, the company is developing a niche within the music community that may not be enough to grow its net registered users, but will at least provide a loyal foundation of users going forward.
CRUNCHING THE NUMBERS
We're not exactly buying MySpace.com fan club t-shirts. We recognize that a lot of the criticism directed at the company is warranted, but considering the $50 to $200 million price tag, MySpace.com could offer a reasonably priced gamble. Facebook is a tough comparison for MySpace.com, but it is one of the more obvious peers. When Facebook raised capital through Goldman Sachs in early 2011, they did so at a $50 billion valuation. With 500 million users, this valued Facebook at $100/user. Facebook's userbase has grown to around 600 million and current speculation approximates Facebook's valuation at $100 billion, or around $166/user.
At these metrics, MySpace's 63 million users value the faded social media company between $6.30 billion to $10.46 billion. Even with a more conservative approach, if we assume that the company lost half of their users since February 2011, this would still value MySpace between $3.15 billion to $5.23 billion.
OBVIOUS OBSERVATION: MYSPACE.COM IS NOT FACEBOOK
Obvious response = the price reflects that. For all investments, there are two factors, price and value. Everyone knows that Facebook is the better company. Despite the fact that Facebook has started to bleed users in developed countries like U.S., U.K. and Canada, they are still growing rapidly in more developed areas. But at what price would you rather buy MySpace than Facebook? At $50 million, MySpace is valued at just $0.79/user!
HOW SIRIUS XM COULD BENEFIT
1. Increase Internet Advertising Revenues - SIRI does generate revenues from advertising, but their predominant source of income is from subscription fees. Purchasing MySpace.com and streaming limited content through the site to registered users for free is a nice low risk way of testing out a growing market. This is an area that Pandora Media (P) currently dominates, but MySpace allows Sirius to test the waters without jeopardizing its underlying subscription based service.
2. Increase Paid Users - MySpace.com's music centric audience is a nice area for satellite radio provider to advertise their services and gain new subscribers. From 2008 to 2010, Sirius XM increased their net subscribers from 19.00 million to 20.19 million users, a 6.26% jump. If even one percent of MySpace.com's users decide to purchase the Sirius XM package, this would represent a 630,000 user increase, or a 3.12% increase. Because of the company's operational leverage and economies of scale, this jump alone could provide significant upside to the stock even before including the other potential synergistic opportunities.
3. Gain New Music Content - Sirius XM has original content stations and as such, they may be able to benefit from the various aspiring musicians on MySpace.com. The growth of Internet music distribution and sales have significantly disrupted the industry. This acquisition by Sirius may just represent a further step in the industry's revolution.
4. New Business (social media) - If Sirius XM purchased MySpace.com with the expressed sole interest in entering social media, it would probably be a bad acquisition. But in light of all of the other synergistic potential, this is really just a free call option. Considering the valuations being assigned to new media and Internet companies, this is a free option with lots of potential.
Criticize me if you want, but this is a brilliant idea because it is a low risk way for Sirius XM to both grow its existing business while also expanding into other segments. The biggest hurdles will likely be related to capital requirements. But even this is easily solved either through a partnership (rather than outright sale) with News Corp or a separate related party partnership with Liberty Media which already owns a sizeable portion of Sirius XM Radio.