In 2009, Sirius XM (SIRI) had to take a deal from Liberty Media that gave 40% of Sirius XM to Liberty or file bankruptcy. The Liberty deal was successful, because Sirius XM avoided bankruptcy and Moody's upgraded Sirius XM's credit rating last year. Sirius XM has a prosperous future because of better promotions, reduced threat of bankruptcy, and better capitalization.
Sirius has been able to concentrate on growing the company and offering a better product rather than being creative with debt refinancing. All companies have to repay, finance and manage debt, including Sirius. However, there is a big difference in handling debt and being neurotic with debt. Sirius has been able to put more time and energy into creating more subscribers. Sirius added 1.7 million net subscribers in 2011, including 540,000 in the fourth quarter. Now that Moody's has upgraded its credit rating, Sirius will spend less on debt interest and more on growth and expansion.
Sirius XM is now able to devote more attention on unfair business practices. A good example is the lawsuit filed against Sound Exchange, which is a record label representative that negotiates for music licenses and fees on behalf of the labels. Sirius contends in the anti-trust complaint that licensing fees have been artificially higher, and that competition and a free market have been eliminated due to Sirius being unable to negotiate with the labels directly. The complaint also says Sound Exchange blocked Sirius from negotiating with the labels and orchestrated a boycott in collusion with industry organizations, music companies and labels. Sirius had to pay more for the licenses over the decade rather than negotiate a better rate without Sound Exchange as the middleman.
Now that Sirius avoided bankruptcy and received capital from Liberty, Sirius can focus on the litigation necessary to reduce the royalty fees. Sirius should win this unfair trade practice litigation, in my opinion, because DMX won the right to negotiate directly with artists and labels in a similar suit. Angus McDonald, an attorney for Live365 internet radio, expects Sirius will negotiate better deals and lower the cost on music licensing. Royalties and licensing fees to Sound Exchange are one of Sirius' biggest expenses. Sirius spent over $200 million in royalty payments in 2010. The cost savings would raise revenue and free up more money for Sirius XM to promote and expand the customer base.
Sirius will offer new, creative promotions to bring in more customers. For example, Sirius recently offered free previews of its more expensive premium packages to basic level subscribers for a couple of months. Listeners will be able to follow the NHL hockey playoffs, tune into Oprah radio, listen to the Indy car racing channel and more for two months free. The idea behind the free previews is that customers will enjoy the stations and get so used to having the extra programming, some will purchase an upgrade for as little as $3 extra a month to keep the programming. It is a good strategy for Sirius with little risk, minimal cost, and a lot of potential reward.
In another initiative, Sirius XM started to stream its signal to Android phones, tablets, and the internet. Sirius will be in more places and increase its footprint faster, because people will not have to buy Sirius equipment in order to listen. Plus, Sirius can also generate revenue from ads on the internet. Sirius XM does not have a competitor in satellite radio, but does have competition from internet radio companies. Pandora (P) could be one of the potential competitors of Sirius. Pandora, which is free and accessible on mobile devices via the internet, could be a problem for Sirius.
Sirius will have to compete with Pandora's internet business model in order to survive. However, Sirius can more easily change and add internet streaming while Pandora would have a more difficult time competing with Sirius on a satellite platform. This gives Sirius XM the option to use the internet as an entry level introduction into Sirius, which will also have to compete with Google (GOOG) for listeners in the future. Google added an internet music service through the Android platform. Google originally hinted it might be an internet streaming radio platform, but decided to provide a store like Apple's (AAPL) iTunes. The service is limited to a few hundred free songs with the rest of the service comprised of a music store where digital music can be purchased and stored. Google music in its current format is more a competitor for Apple's iTunes than for Sirius XM.
Sirius has announced it is giving three months of free satellite radio service with every new Toyota. Sirius expects new car buyers will enjoy the service, get used to having it, and turn into subscribers. Sirius will get far more in subscriber revenue than it will lose in the free trials. Toyota likes the added value to its product and provides dealers an additional selling point to present to customers. Hyundai has offered a similar deal to add value to its pre-owned vehicles and lure customers into showrooms. Sirius will continue to expand its car audio service and make Sirius satellite radio an automotive necessity.
If people can get a free service like Pandora through internet on phone or in the car, how does Sirius compete? According to Spencer Osborne, founder of the Satellite Radio Group, satellite, internet and terrestrial radio can all share the same customer base and survive. There is a place for all three radio platforms and enough revenue to go around. Sirius has carved out a niche out in car audio dashboards ahead of Pandora and internet radio.
Sirius also has improved its platform as well. Sirius added new "Pandora-like" features, such as skipping songs, to its new 2.0 satellite system. Sirius is aware of the competition from internet radio. Sirius made changes like the new 2.0 system to keep its existing subscribers happy, and added the internet and Android platforms to keep up with trends and changes in technology. Sirius XM added customers and managed its debt well. Sirius improved promotions to attract subscribers and aggressively fought unfair business practices. Sirius has also shown the willingness to adapt to trends and technology. Profit margins are thin and Sirius is not listed as investment grade yet.Yet, I believe Sirius will survive and be a stable, profitable company over the next decade. Sirius XM is currently trading around $2, and if it continues to seek out new growth, I think the stock will reach $2.50 by mid 2013. I strongly recommend buying this stock now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.