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Fellow Seeking Alpha contributor Cameron Kaine did an excellent job shooting down the idea that Sirius XM (NASDAQ:SIRI) should offer up an advertiser-supported suite of channels for free:

For all of the talk about how Internet radio giant Pandora (NYSE:P) will fail because it does not have any "subscribers" and only "active listeners," there is now talk that Sirius XM should follow suit. Where Pandora's model was essentially ridiculed because it is an advertiser-driven business model, it seems all of a sudden it's no longer a bad idea if Sirius were to adopt the same thing.

He did, however, leave a few things out that warrant a mention.

First off, objectively speaking, Sirius XM CEO Mel Karmazin shot down the notion of advertiser-backed radio on his company's most recent conference call:

So on the question about advertising, if you think about where most of the - or the biggest piece of the pie goes in advertising - it's television, right. And television has the benefit of the sight, the visual, the sound, high definition, big-screen, and now you take a look at what happens in the mobile environment. And in a mobile environment, you're not really able to do as robust in video, particularly if you think about it in the car. So you're sort of limited in what type of advertising you're really going to be able to put on that mobile device. And if the mobile device is audio commercials, that sounds an awful lot like FM radio to me, and I also believe on the advertising side and I felt this way for a number of years, and that is that there is just too much supply that's out there. There's no barrier to entry for people to be on the Internet. And there are more companies that are taking advertising dollars, so therefore, the idea of having so much supply puts the power in the hands of the buyer of the advertising, other than when you get big events like the Super Bowl or big-ticket items. There is just a robust amount of advertising inventory available. So I think it's challenging.

He was quite clear. That said, if Mel is nothing else, he is a master of spin. Ask anybody who has been around terrestrial radio for more than a second, Mel can distort reality and massage that distorted reality to support his case or unseen motives with the best of them.

Let us take his points one-by-one and then address why it still remains a horrible idea for Sirius to go down the free route, re: advertising. I will close by noting what I think the company should do with relation to "free."

The Zen (Spin) Master

And television has the benefit of the sight, the visual, the sound, high definition, big-screen, and now you take a look at what happens in the mobile environment. And in a mobile environment, you're not really able to do as robust in video, particularly if you think about it in the car.

Another thing anybody who knows Mel's history understands is that he's not stupid. Mel cannot possibly believe such a simplistic argument.

First off, he assumes that the consumer of mobile advertising does most mobile listening in the car. I don't think this is necessarily the case. But, that aside, Karmazin's comment, given evidence to the contrary, shows that he is either being disingenuous or he is even more behind the times and stuck in his old-school terrestrial radio rut than I thought he was in the first place.

Consider how findings from a recent global survey contradict Mel's views on television's captive and active audience versus mobile's apparently passive one:

A new study out by InMobi, an independent mobile ad network, shows that people are now consuming media in greater amounts on mobile devices such as mobiles and tablets, than they are on traditional media such as television and newspapers.

The survey conducted in Q4 2011 questioned over 20,000 mobile consumers in 18 markets across all continents, found that mobile web users spending 27% of their media time on mobile devices and only 22% of their media time on TV.

Additionally, people on mobile devices are more receptive to advertisements than those watching television or reading newspapers with 42% of respondents claiming that mobile advertising has introduced them to something new.

Let us dig deeper into that from the actual report:

Click to enlarge

Often, terrestrial radio (as well as television) acts as background noise. I can listen for hours and not recall one song I heard, let alone an ad. Now, who knows, maybe on a subconscious level they're getting me, but that's debatable and tough to prove. I have thought about this and, really, in terms of interaction, what do you interact with more when listening to music or doing something else that can be a passive activity - a radio, your computer, an iPad, your mobile phone? I think the answer is obvious.

If Mel wants to move Sirius XM forward, he needs to get with the times. The days of channeling Herb Tarlek and using clips from Glengarry Glen Ross to motivate your sales team are long gone. We're entering a mobile world, if we're not fully ensconced already. Old paradigms shift. Outdated ways of doing things die hard. CEOs and the companies they run cannot survive if they do not adapt and see the future before or, at the very least, as it unfolds.

So you're sort of limited in what type of advertising you're really going to be able to put on that mobile device.

Wow. I will meet with Pandora co-founder Tim Westergren soon. If he can make time for me, I am sure he could spare a few seconds for Mel.

If that statement does not scare you out of a long position in SIRI, I am not sure what else possibly could. That's the anti-Steve Jobs. The anti-visionary. I'm not sure a CEO should ever use the word "limited" in that type of context, particularly one who competes, theoretically, in the new media space.

You are only limited by your imagination.

-Probably not Mel

There's no barrier to entry for people to be on the Internet. And there are more companies that are taking advertising dollars, so therefore, the idea of having so much supply puts the power in the hands of the buyer of the advertising ...

I am not sure when Mel last "surfed the Web," but it only takes a second to show that the often-repeated statement - there's no barriers to entry for people to be on the Internet - carries with it very little practical meaning.

Of course, Mel's right. It's pretty easy to "be on the Internet." At the same time, it's incredibly difficult to cut through and become immensely popular, widely-accessed and a generator of considerable and exponentially-growing revenue on the Internet. The very fact that there's no barrier to entry and that practically everybody is on the Internet ends up supporting that point. There's no barriers to entry to write a book any longer thanks to the explosion of self-publishing. Millions of people around the globe do it. Very few get to quit their day jobs. The ones who can do more than merely "be" on the Internet. They cut through and grab a considerable chunk of available pies, such as mobile ad revenue.

Undoubtedly, thousands upon thousands of companies and people will attempt to snag a piece of mobile advertising dollars. It's safe to say that, when the dust settles, about a dozen, if that, will own any meaningful share of the market. Google (NASDAQ:GOOG), Pandora and a few others have set themselves up to remain the leaders. So, yeah, it's a crowded space. These types of areas have always been crowded, particularly since Al Gore invented the Internet. However, leaders emerge and those with limited imaginations or something else holding them back end up fighting for the leftover scraps.

All of that said, I agree with Mel's endpoint. It's probably not wise for Sirius XM to delve too deep into advertising via most types of free models.

If I did not respect Mel, know his history and accomplishments well and fully recognize that he's an incredibly sharp guy, I would say they should not make the move because the CEO has no clue. But, that's not the case. I think Mel is pulling one over on us here. Taking indirect swipes at the Pandoras of the world. Because, let's face it, Mel could sell ice to an Eskimo or Tim Tebow to the New York Jets.

If he wanted to he could pound the pavement and spin his way around Madison Avenue and squeeze enough business out of ad agencies to make a freemium Sirius XM profitable. That's what Mel does. And if Howard offended an advertiser, Mel would stand behind him like he always has, unlike how Clear Channel (CCMO.PK) has distanced itself from Rush Limbaugh. (I am no fan of Rush. In fact, he's one of the few people I might actually dislike, but we know radio's dead when companies no longer have the leverage and/or the will to support talent. But, I digress.)

What Should Sirius XM Do?

As I have said for months, Sirius XM should get creative with advertising and partnerships. Everything it does should focus on two goals - diversifying its revenue stream and attracting new subscribers it would likely not obtain via its current, standard efforts.

First, if it can produce, for prospective advertisers, numbers that reflect a measurable and meaningful audience (I am not sure it can), it should attempt to sell sponsorships, not commercials, on all of its stations. But, again, I do not think most Sirius XM stations generate the critical mass necessary to make such a move worthwhile and potentially profitable. Just listen to the advertisers on Howard Stern's show. Many are the ones other media outlets simply will not touch. In other words, I doubt SIRI can score major accounts.

Second, the company should focus on partnerships. Feeble app refreshes aside, Sirius XM has lagged the competition in terms of pushing its mobile platforms. If the company offers anything for free, it should be key programming, such as Stern, in limited quantities to users of platforms such as Pandora, iHeart Radio, other Internet radio, DirecTV (NASDAQ:DTV) or DISH Network (NASDAQ:DISH) and others willing to hook up.

Sirius XM has done a horrendous job opening up new markets. It might as well lock Howard Stern in a closet. The only time he gets any press or exposure is when he generates it himself or some external force (e.g., America's Got Talent) produces it for him. Again, this is an old WKRP-style terrestrial radio trick that Karmazin still relies on. Siphon off of free publicity, but do not take the initiative to introduce yourself, to diverse and capable audiences, in any meaningful way.

Until we get a clear picture of Sirius XM's future direction, the stock remains a short at worst, a hold at best. I cannot possibly buy a stock with the ownership and share structure up in the air, insiders selling en masse and a CEO with intentions and visions it's not possible to be even close to sure of.

Source: Short Or Hold Sirius XM, Just Don't Buy It