Sirius XM (SIRI) CEO Mel Karmazin's behavior seems to be getting weirder by the day. Karmazin has his legal team fighting hard to keep Liberty Media (LMCA) from taking over his company, and he's selling off a large block of Sirius stock at the same time. In other words, he seems to be facilitating the very thing he supposedly wants to stop.
On Friday, May 18, 2012, Karmazin apparently sold 17 million of his Sirius stock options off. The main beneficiary of that action would be John Malone, the owner of Liberty, who needs to buy up 51% of Sirius to gain control of it. The FCC has told Malone that he can't take ownership of Sirius's licenses without a majority stake in the company.
So it seems like Karmazin is not only helping Malone take over his company, he's profiting from it. Karmazin made around $33.66 million from the sale because the shares were worth between $1.97 and $1.98 a piece when he sold them. At the close of trading on the 18th, Sirius shares had fallen to $1.87. If Karmazin had waited, he would have lost money. This behavior seems designed to help Malone in two ways: first, it gives him more Sirius stock to buy up. Second, it is driving down the price of Sirius, which also makes Malone's takeover bid easier. The real victims here are Sirius shareholders, who are losing value.
If this bizarre behavior continues, Sirius looks like it will keep falling perhaps to $1.50, and maybe even lower than that. If that happens, a Liberty takeover is almost guaranteed. It also means that Sirius could lose more of its value, even though it has done very well. This situation definitely bears watching because Karmazin still has another 32 million Sirius stock options that he can unload. The question is if he will he sell them or not, and my guess is that he will. This dumping of stock probably indicates that Karmazin thinks Liberty will soon get control of Sirius and that Mr. Malone will give him the boot, so he's cashing out.
If Karmazin dumps more Sirius stock, it will sink even lower. How low could it sink? Try well under $1.50, perhaps even $1, before this scenario plays out. The person happiest about this has to be Malone, who is getting a really great asset at a tremendous price. Liberty stockholders should also be smiling. Its shares went up by $1.15 to $80.59 on May 18.
Clear Channel claims to have 10 Million Registered Online Users
Privately-held Clear Channel Communications is claiming that it has 10 million registered users for its iHeartRadio streaming radio service. Clear Channel made this claim in a press release in which it also claimed that it had signed all of those users up in just eight months.
This is still miniscule compared to Pandora (P), which claims to have 150 million users in the U.S. alone, so it is hard to see how this would help Clear Channel's stock prices. It should be noted here that it is impossible to verify this kind of claim. What is a registered user, and more importantly, is it something that can actually be used to generate revenue? There is no guarantee that somebody who registers for a service will actually use it.
Advertisers that sign up with outfits like Pandora and Clear Channel obviously want some evidence that somebody is actually listening to their advertising. These claims do not indicate any additional revenue or earning from either company.
One recent debacle that might hurt both Pandora and Clear Channel was GM's decision not to buy any more advertising from on Facebook (FB). General Motors announced that it would stop buying dropping its advertising on the Social Network on May 16. The reason the automaker took that move was obvious -- it was not making any money by selling cars through Facebook. Another problem is that there is no way to tell if such advertising works, or to verify if anybody is looking at the ads it posts there.
That does not bode well for Pandora, which is counting on advertising to generate revenue. It's going to be a lot tougher for Pandora and any potential competitors to sell ads if major advertisers are saying that next generation online advertising does not work. One victim of the decision could be Pandora's stock value, which could drop because of doubts about online advertising.
Spotify Attracts Loads of Venture Capital Despite Losses
In addition to doubts about its business model, Pandora also faces the potential of an aggressive and well -financed competitor. Spotify, which could be launching its own online radio network in the U.S., could have as much as $4 billion in financing, according to the New York Times. Goldman Sachs is one of the outfits arranging financing for the music web site, based in Sweden.
With that kind of money, Spotify would be in a position to make a major foray into the U.S. radio business if it wanted to do so. Such aggressive competition could force Pandora, and perhaps Sirius, into positions where they will have to spend a fortune to protect their market share. That could definitely hurt the bottom line at both companies.
Last month, Spotify's boss Daniel Ek told a Swedish newspaper that his company made $889 million in revenue in 2011. That is hard to verify, but it sure sounds like Spotify is moving towards going public. If it does, it will be hard to see how much Spotify's stock would be worth. After all, like Pandora, Spotify essentially gives its service away.
The New York Times noted that Spotify is likely to post a loss this year, even though it has been able to raise lots of venture capital money. The company lost $60 million last year, according to the Times. One possibility is that another company, such as Microsoft (MSFT) or Facebook, could buy Spotify. If that happened, that company could be counted among Sirius's competitors.
Despite the hype, Sirius has a serious advantage over so-called Freemium services such as Pandora, iHeart and Spotify. It actually collects subscription charges, so it has cash coming in. There's no indication that any of these services are making money, and their business model of internet advertising is questionable. If even Facebook can't get social network and online advertising right, as GM seems to think, how can companies such as Pandora, iHeart and Spotify? One huge advantage that Sirius can show potential advertisers is a list of paid subscribers that are actual human beings, not registered computers.
Another advantage that Sirius and iHeart have in the advertising arena is that they can offer something besides music. Sirius has coverage of virtually sporting event under the sun and talking programming, including Howard Stern. iHeart, being part of Clear Channel, can offer Rush Limbaugh. Neither Pandora nor Spotify can offer anything other than music.
Advertisers will undoubtedly want something other than music, which will make those services a hard sale. That will cut into their potential revenue and their stock value. If Pandora wants to preserve its stock value, it's going to have to start offering something besides music and to start proving that it can attract advertisers, and fast. If it doesn't, Pandora stock could sink as fast as Sirius shares has have been sinking.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
