"Authors and readers are the same. All of our posts are filled with our biases - it reflects real life. Your point is valid, but I don't care about appearing objective. I only care if you can dispute any data in the article."
- Cameron Kaine
It is no secret that revenues of satellite radio provider Sirius XM (SIRI) have been driven by increasing auto sales over the past couple of years. And if you are long Sirius at the moment you should be disappointed to realize that this is not likely to change as Sirius investors will always continue to wait for "auto numbers." I'm trying to wonder if my previous investment in Time Warner Cable (TWC) has ever caused me to do due diligence in the real estate market? Remarkably even with the foreclosure concerns and the bursting of the housing bubble, neither cable or satellite television companies such as DirecTV (DTV) felt any significant impact.
Expecting market saturation
Investors witnessed firsthand what happened to Sirius XM when auto sales plummeted in 2008 as auto manufactures accentuated the term "bailout" and brought the term "too big to fail" toward both prominence and infamy. So the question is why does Sirius investors insist upon supporting the company's model with its dependency on the automobile? It seems that we fail to realize that unless Sirius alters its strategy the revenue trend will eventually decouple from auto sales as the number of cars on the road with factory-installed Sirius XM radios will reach levels of saturation.
Case in point, in last year's shareholder meeting on May 25, CEO Mel Karmazin estimated that there were then 40 million cars with installed Sirius XM receivers (see slide 8 of the exhibit to the 8-K, filed May 25). Karmazin then projected that by 2015 over 70 million vehicles will have Sirius XM installed. What investors need to realize is that revenue growth will eventually begin to flatten before the number of cars on the road with Sirius XM installed peaks as new cars with satellite radio begin to replace older cars with existing subscriptions.
Based on the data in that presentation and extrapolating current auto sales trends to pre-recession peaks, I estimate that subscriptions from new car sales will likely plateau by the middle of 2014. I thought about this last night as I continue to read comments from Sirius XM investors claiming in five years Sirius will do X, in 10 years Sirius will do Y. The reality is unless Sirius removes its dependency on the auto it may not have more than two years of moderate growth left - maybe three. Because as the graphic above shows, eventually auto sales will slow and what happens when the dealerships become empty?
Why Sirius is still a (satellite) monopoly
Readers continue to make the claim that Sirius is a monopoly. I continue to argue that it is not and will perhaps concede that it is a monopoly (only) from the standpoint that it is the only one with a satellite delivery model. But investors must realize the real reason why the company remains a monopoly in that sense is because other businesses have long realized the issue with market saturation and Sirius has yet to prove that there is a significant enough demand for its business. This is why market saturation is so important and no other company has made an attempt to enter Sirius' space - it's not profitable enough. It comes down to simple economics and for this the issue of saturation is often unavoidable in any business.
Having said that, it can be handled if a business prepares and adjusts adequately - but are you willing to bet that Sirius XM has or can? Unfortunately for investors, Sirius does not seem prepared. Any business must carefully consider supply and demand. Market saturation is when the quantity of products in use in the market place is close to or at its maximum. In Sirius' case, one can safely predict that the company will reach its saturation point by at least 2015. Can Sirius figure out a way to mitigate and adjust for this event? What can it do to sustain its ability to monetize its model well into the future? Does it care? When considering Liberty's (LMCA) involvement, the question becomes, does it matter?
Many companies were already aware of the problems of market saturation and had intentionally designed their products to "wear down" or otherwise need replacement at some point. I made the point in the article and referenced IBM because services revenue also becomes an important consideration. When product revenue began to slow, IBM smartly changed its business model toward providing services once it saw saturation not only in the large computer server market but also in personal computers.
Think about it this way from the standpoint of telephones and/or wireless carriers. At one point there was only AT&T (T). It made then so much money that it could not service the demand of its customers. Then entered MCI (Worldcom), still both could not provide enough service for the demand. This convinced Sprint (S) to enter the realm. Then it was Bell Atlantic and GTE which became Verizon (VZ). Then Nextel arrived, then MetroPCS, T-Mobile., etc. etc. etc. And yet, more names are developing as we speak, but on smaller scales such as Cricket and Boost. The point is competition continues to grow because of market demand. We only have Sirius XM and yet, it can't even get into 50% of the automobile? Today, it is still a "monopoly" because the level of demand does not justify any other name to enter the space.
This continues the process of understanding what Sirius XM is and helping investors to come up with more reasonable expectations for its future. Investors need to understand considerations such as churn, its projected free cash flow, adjusted EBITDA, and debt restructuring as well as Sirius' ability to be forward-looking and adjust adequately. I'm not convinced that it is forward-looking enough. And for this reason, it remains a good short.