Sirius XM (SIRI) has often been compared to the cable television industry. They both play in the media space, require large capital investment, and most importantly depend on subscribers willing to pay for their news and entertainment. It is largely for this last reason that the Sirius investor should be interested in a recent Washington Post article. On August 10, the headline screamed "Pay TV Faces ‘Toxic Mix’ as Subscribers Cancel in Record Numbers." The opening sentence noted that cable TV companies lost 580,000 customers in the second quarter, the highest number ever according to Bloomberg data. Is this an omen of things to come for Sirius? A closer look at some of the points raised in the article should provide a degree a comfort for Sirius investors.
One has to go down to the fourth paragraph of the article to find that telcos AT&T (T) and Verizon (VZ) gained 386,000 subscribers. I would suggest that this would indicate the losses are more in the 200,000 subscriber range. While these telcos are not classified as cable companies, they are taking market share from some of the purer "cable" plays like Comcast Corp. (CMCSA) and Charter Communications Inc. (CHTR).
It is important to take note of the economic reasons cited in the article for the loss of subscribers. Cablevision (CVC) noted that the losses were more pronounced in lower-income neighborhoods. And Sanford C. Bernstein analyst Craig Moffet was quoted as saying:
Rising prices for pay TV, coupled with growing availability of lower-cost alternatives, add to a toxic mix at a time when disposable income isn’t growing. For younger demographics, where in many cohorts unemployment is north of 30 percent, and especially for those with limited or no interest in sports, the pay-TV equation is almost inarguably getting less attractive.
It was also noted that subscribers are moving to online options like Netflix Inc. (NFLX) and Hulu LLC.
Will a price increase next year drive Sirius customers to migrate to Internet alternatives or return to terrestrial radio? If the economic realities facing pay-TV customers are forcing cancellations, are the Sirius subscribers facing the same budgetary constraints? It could be argued that Sirius customers are coming from a more affluent demographic that can afford to purchase new cars, and the economic pain they are suffering should be somewhat less. It could also be argued that the typical pay-TV bill is substantially higher than a Sirius subscription.
It would be naive to assume that all Sirius subscribers would be totally immune to the weak economy. And, unless the economy continues to weaken, it also seems reasonable to assume that such subscriber losses should be small.
Additional disclosure: I have $3 January 2012 covered calls against most of my Sirius position. I may add to my long position of SIRI, T or VZ at any time and might close or open covered call positions at any time. I have no positions in the other stocks mentioned.