Goldman's Sirius Call: Solid Thesis, Poor Timing

I just wanted to make something clear with all this talk about satellite radio. I'll be blunt. It's going nowhere. That is why I haven't followed Sirius (SIRI) or XM (XMSR) for several years. Why waste my time when I know how the game will turn out?

Let me explain. After releasing a research analysis on the sector in my newsletter in 2004-2005, I have not bothered to follow the satellite radio stocks because I already knew their longer-term fate. It's the same action I have taken on other companies that I predicted would go bankrupt or be sold on the cheap. And I have been right about all of them. It's not that I have a crystal ball or that I'm amazingly clever; it's just a matter of using some common sense combined with an understanding of business dynamics and competitive forces. I will summarize the main points of the 2004-2005 analysis I made on Sirius and the future of satellite radio:

Sirius will not make it. It will either go under or be sold on the auction block. Why? The industry has poor business dynamics as a standalone. It has high churn, short retention, and high customer acquisition costs. Only a diversified company can remain in this business. The wireless providers realized the need to secure a certain level of guaranteed revenues and they came up with contracts. The satellite radio business has not structured any value into their business that would allow them to drive revenues on a contractual basis. As a result, revenues are highly uncertain and will remain volatile, while net revenues per subscriber have little room for growth due to the high churn.

The enormous debt seen in Sirius and XM is just one indication of the poor business fundamentals of this quasi-sector. Just look at the profit and operating margins. These guys won't be able to turn a profit until they surpass 20 million subscribers. And that simply is not going to happen for a very long time if ever. As it stands today, Sirius is in much deeper trouble than XM. The company self-destructed by giving away most of its equity to its CEO and Howard Stern, as if the stock had little value.

It turns out that it didn't have much value. Even Stern apparently realized this and sold his stock.

While XM is fundamentally stronger and will emerge the winner, this won't last long. The big guys in media will force XM out when Internet is installed in autos which is coming in a few years. Yahoo (YHOO), Microsoft (MSFT) and others will offer free Internet radio as a way to seize the market. Then they will offer a paid service similar to satellite. This will steal away the customer base of the satellite providers. In the meantime, earnings from their other business lines will enable them to endure difficult transitional periods. If needed, the big media players will create a price war which Sirius and XM will not survive.

The only one's who will profit from Sirius are the CEO and Stern.

Things are playing out just as I predicted. Soon you will see how even the XM-Sirius combined entity gets destroyed when Internet radio enters the scene. The only thing that has changed in the four years since my report is that Yahoo has weakened and may not go forward with an Internet radio platform, at least for a while. But you can bet others will. If you do not understand the media war that has been going on now for several years, you really need to get up to speed. The big players in this war are Microsoft, Sony (SNE), Yahoo, some of the telecom and cable providers. The XM-Sirius entity will ultimately have to go up against these guys and they aren't going to win.

Now, will the combined XM-Sirius entity appreciate in price from here? I wouldn't doubt it. After all, many companies on a downward trend make short-term bounces. But that might only provide an exit for existing shareholders, as the odds of satellite radio surviving long-term are very slim. Internet radio is the future. And the only way satellite will play into the picture is through satellite-Internet radio, which will be a free service, with an optional paid service for no commercials. Once the paid service of XM-Sirius is knocked out, only then will the paid service model be a growing entity. And the only role XM-Sirius will play in this might be after being bought on the cheap by one of the big players.

You can bet Sirius is desperate for this merger to go through because they realize they're on their last leg. It's similar to the situation with Blockbuster (BBI) practically bending over backwards to merge with Circuit City (CC). Unlike XM, Circuit City has something to offer-a real business with a long history of profits and no debt (only seasonal borrowing or inventories). You can probably tell how I feel about any possible Circuit City-Blockbuster deal. But that's another story.

Only time will tell if I was completely right in my analysis. But one thing is for certain: those who read my report 4 years ago (quoted above) had a chance to bail out of XM and Sirius at $25 and $7 respectively.

Sirius was never a stock held by a large percentage of institutions because they realized the risks. I continue to notice the same investors who buy terrible stocks like Sirius have a habit of buying trash like Krispy Kreme (KKD) and a host of others. People, if you really want to play this investment game, you need to start figuring out these things on your own. Otherwise, leave the investing game to the pros because the really sharp guys out there know what's going on and they sure aren't going to tell you. And you cannot count on Wall Street to help you. While the Goldman analyst is dead right, I find it remarkable it took him so many years to issue this report. I'm not sure whether he just isn't that bright or his focus was on landing banking business. Most likely, it was the former since I still have not read any report that provides the insight I have.

Wall Street makes sure investors have a misguided sense of reality by issuing so many "Buy" ratings. Everywhere you look you see "experts" talk about how good it is to invest in the stock market but you never hear timely warnings when you should get out and wait for the next bull market. The refusal of Wall Street and those who control the media to even hint that there might be a period of a few years when you should stay out of the market is the reason why most investors get caught in bear markets.

Going forward, if you want to have a chance as an investor you're really going to need to change this mentality. Otherwise, the "do-it-yourself" approach is going to result in a disaster for many. Remember, the promoters of this fantasy – the online brokers – are just as guilty of this deceit as Wall Street. And they are making profits selling you this epiphany. So you might be better off buying ETFs.

Disclosure: None

Comments

[Rawbhurt]

Mike,you hit the nail right on the head.Thank's for the wake up call.
I've been a sirius stock holder for the last 5 months and my price to break even is $2.62 so you could bet that I will be one of those quick in and out,sooné

[Up the tail pipe again.]

Boy this guy has some balls. But as usual he does not commit 100%.

[Joe F.]

Now that your done loving yourself and basking in the glow of your utter genius answer this question.

How do you think internet radio beamed into cars will pay for the rights to broadcast their musical content? Do you think the artists and publishers are just going to let them do it for free once it becomes ubiquitous? How about other "prime" content, are they just going to produce it out of thin air?

Here's your problem, it going to cost them more money to establish it and they're either going to have commercials to subsidize content, or they are going to offer subscriptions. So it isn't the magic wand you are hoping for.

It's just going to be more radio with an inferior product.
It's also got an uphill battle and it's costs will be just as big.

End of story.

[Joe F.]

Oh yeh, here's some other grain for you to feed on to further increase your omnipotence and clairvoyant skillset.

Slumping car sales are a back burner issue as penetration rates continue to increase and over any given period US car sales remain pretty constant with some years up and some down.
Mostly with a general bias up.

Also keep in mind that SDARS does not only go into american made vehicles. So I wouldn't over rate Ford and GM too heavily.

In any event, it really means very little as does the retail story until the issue of the merger is determined. You just can't mine the data for what it would mean going forward after a merger - period.

The i-pod story should not be overlooked. Sat rad on ANY portable device as part of a suscription becomes huge - especially for the Christmas season.

And, as I've always said, you will see a SDARS music library with subscriptions that include a set # of downloads per month with your subscription. This will be a huge marketing draw that I have seen no one mention at this point.

The NAB really does have a problem going forward as SDARS is destined to become ubiquitous. The recent i-pod story and the fact that it's making it into more and more cars everyday is driving the point home. The stocks got washed out with capitulation selling
and people are starting to understand that as well.

Upon the merger you'll start to see the forecasts ramp regarding all of the above. And the stock will climb as each and every brokerage firm will start recommending exposure to the industry for their clients.

There really will be some fireworks this July fourth. Count on it!

[Rawbhurt]

Good bring on the fourth of july,so I could move on after all this political mess.

[BURTBECK]

I couldn't have said it better myself.
I attempted to on 6/25 when I made a comment on a Tyler Slavery blog at 9:19AM---interested SIRI/XM players might like to read it. It puts up a lot of numbers to reinforce the premise here.
Just for the record I established a core 5-figure share short position in SIRI 2004-2006 @ average $5.51 and will cover , I'm confident, below 50 cents sometime next two years. Also have had maybe 20 very short-term trades on SIRI short side and have zero losses on same.

[Joe F.]

That's just great burtbeck. Shorting a two dollar stock just makes so much sense especially with a merger about to be announced.

You are such a very smart investor as is Mr. Stathis.

[George Bowser Jr]

You may have something here. I do not think the financial fundamentals are too ripe for the satellite radio industry. For example, the lack of advertising (The last time I checked anyhow). Plus, consumer spending is down, as well as the purchase of vehicles. Unless they create a new product, I do not like the viability of either company as a public entity, maybe private, similar to what happened with Satellite phone service. Those companies went bankrupt(Iridium and Globalstar) and did not show any type of consistent revenue generation until, I hate to say, the war of terror started.

[Joe F.]

Comparing sat rad to sat telephone?

Hello?

[Up the tail pipe again.]

How can one analist say subs will reach 55 million by 2012 and this one says lucky to achieve 20 million? Citi says 9 a share 12 months out and GS says 1.75. Are these analist on the same planet. It will be very interesting to see who eats crow. No wait a minute. They will just revise their opinion.

[cos10000]

I applaud this author. A true voice of rationality and knowledge in a sea of empty rhetoric.

He says out loud what most of the desperate believers on these message boards will never admit. The satellite radio stocks have practically no upside from their current levels, and there are simply too many more attractive investment opportunities out there.

This is not arrogance. It is a simple acknowledgement of the economic and business realities of satellite radio.

Both companies have leveraged themselves beyond the point of redemption, overspent carelessly on advertising and talent, and have generally overextended their cost structures while making wildly optimistic assumptions about subscriber growth, retention, and profitability.

Even the airlines and wireless providers (also with high debt levels) know enough to create programs that will retain customers, such as frequent flier programs and 2-year contracts. The satrad companies have built no exit barriers into their business models, while taking all future growth on consumers' proclivity to buy a new car. With the credit markets locked, and fuel at $4.50 a gallon, it doesn't take much to connect the dots to satrad's dark and grim future.

To those of you who are long, it is not too late to save face and sell. But the longer you cling to your flimsy hopes and wishful thinking, the more it is going to cost you.

[BURTBECK]

To ripped--Get with it! I have not, nor would ever, short a $2 stock. I shorted at average $5.51 and therefore have around $3.50 per share paper profit right now. I agree it's too late to do it now--the law of diminishing returns plus much poorer risk/reward etc etc. But I am prepared to milk the thing for STILL MORE profit because I believe even with a merger SATRAD will ultimately be a total failure.
IF I am wrong, and the price gets up to the $4's, for example, my profit cushion will enable me to cover with, albeit smaller, gain.

Different subject---Martin's conditional approval of the merger was announced two weeks ago and it is a very good assumption that the merger will go thru probably exactly as he stated. All the SIRI longs have long awaited such a thing as the virtual second coming and the stock did zoom for a few trades the first trading morning.
BUT that was short-lived, and PPS has been significantly lower for well over a week. How come?? Do a few negative comments from GS negate the 17 months of merger hoopla?? I would be interested in opinions of SIRI PPS one week and one month after merger is official. I'll start it off by saying $2.40 then $1.90.

[163888]

ripped, That is exaxtly what I was going to say. I seem to recall all the internet radio people claiming they were having a hard time now, with the old royalties that they where paying and if the new ones where put in, then they would not make it. By the way, even the cities are having a hard time getting wifi throughout the city, so even if that happens what is the internet going to do about small towns and rural areas. I guess they will be out of luck, according to you, mike. As of right now and in the near future satellite is the only way to maintain a constant connection with out putting towers everywhere. I also have some news Mark W. has been bearish on the satellite sector for at least 2 years that I recall.


By your estimate, I have to wonder why radio stocks such as CCU are not much much lower. After all, they will be put out of business by this also. Content is and always will be king. Weather it is terrestrial or internet unless it is a paid subscription you are going to have less of it and of poorer quality. Same reason people pay for cable/satellite tv. I am sure many like you, back then thought no one would pay for something they could get for free, except it was not the same content was it.

I am glad I never listened to people like you when it came to DISH and DTV. I would still be working for a living. Yes that is right I heard the samething then also. The cost are to high, there is already to much competetion, they are carring to much dept, ect., ect., ect.

[Merger Mania]

Btw...I guess I should sell my shares of KKD? SIRI and KKD??!! Haaa Haaa Haaaaa haaaaaaaaaaaaa!!!!!!!!...

"I continue to notice the same investors who buy terrible stocks like Sirius have a habit of buying trash like Krispy Kreme (KKD) and a host of others."

[163888]

BERTBECK, I will tell you why, because when he first anounced everyone thought a full vote would be out very soon, then what do we here, Tate may be on the fence, it still is not a sure thing, more concessions maybe added ect.ect. Until people see that it is absolutely for sure then it will pop. I have never thought it would go very high do to it taking to long (3.8 is what I figured). That it would need the companies coming out with good guidance, and something about new product coming out soon, to even get that high. Now if we where talking about the end of last year or beginning of this year, I think even you would agree things would have been different. I do believe If they tell us that the interoperable radios will be available very soon then you will see everything pick up. I believe that once those radios are available that changes everything. That radio is the key, also to most synergies, along with CAPEX.

[Lendog]

I have marked this story for future embarrassment!

You really need to get two of your friends (If you have any) and have them pull on each side of your shoulders and see if they can pull your head out of you ass!

Have a nice day :)

[cos10000]

User 219292 -- Do you really think your own thinking is "unbiased"? Or is the writer "biased" because he's the healthy voice of dissent who doesn't get mired in the flawed thinking and cheerleader mentality of these message boards?

[cos10000]

If any of the satrad cheerlesders on these boards can honestly say they have read the 10-Ks of both companies, and have researched the industry fundamentals thoroughly, please acknowledge your accomplishment by stating so.

[Sirius Fan]

Mr. Stathis,

You have no position in either stock, have not even followed the sector for years, yet here you are, mere hours or days away from a major announcement regarding the future of these two companies proclaiming your expertise and foretelling disaster?

Give Clear Channel and the NAB their money back, sir. You are far too transparent.

[cos10000]

WFC, like so many others on these boards, you draw your conslusion first, then you selectively cite facts that support it. This kind of thinking is what prompts investors such as yourself to lose money. It is why you will realize an average annual return of 4%. You simply don't think critically and objectively enough.

The Vicar of Value is of independent mind, with no business or financial ties to the author, to the NAB, or to either satellite radio company. He holds no position in either, and does not seek to due to the high opportunity costs associated with investing in unprofitable satellite radio companies.

[cos10000]

WFC - both The Vicar and the author may have inflated egos, but we are also more successful investors than you are.

[Rawbhurt]

Please somedody,explane to me why in the hell we have target prices from these so called experts, $1.75 - $4.00 - $5.00 - $ 9.00.
When these people are looking at the same quaterly reports.
When you go to school and at the end of a session you're report card reflex on the grades you've accomplished during that session. And not 4 different grades.
So why is this so chineese?

[163888]

Sirius Fan, He will not be able to cash that check because by his own logic terrestrial radio will also be put out of business. I only have to ask why are their stocks not at two dollars. If a bussiness is doomed it is doomed weather it be a year or 4 years down the line I would not want to be in it.

I do wonder if he has any articles telling us of the terrestrial radios doom also.

[ARI D K]

I agree with WFC 100%, terrestial radio's last few attemts prior to merger approval, to influence weak minds, my feeling is that there are many news on hold till after the FCC approval. New concepts , new technologies. Do you people think that Mel is using all of his energy just for the FCC approval ? This guy Stathis thinks he is a smart azz HMMMM. We shall see.

[Frontmed]

When did Stern sell his shares? I missed that announcement and my crystal ball is not as clear and as arrogant as yours.

[cos10000]

WFC: if The Vicar is actually the author's own alter-ego, as you shallowly claim in your prior post, then why has The Vicar made a number of enlightening and thought-provoking posts prior to the advent of the author's article?

[163888]

219312, I will just say. I guarantee you, Mel Karmazin has more knowledge about the workings of the radio business then this guy (Mike Stathis) and for that matter most in the radio bussiness it self. Why do you think a man that smart took a pay cut to come to SIRI. I can tell you it wasn't just because he and the chairman of the board at Viacom did not get along, by the way even though they did not get along he kept Mel K. He could have gone anywhere in radio, hell I believe anywhere in any sector and made twice as much as he is making as SIRI. One would have to ask yourself why would a man like Mel K. go to such a small company that could go out bussiness. Because lets face it things where much more shakey back then, then they are now.

[Up the tail pipe again.]

Hey Vicar of No Value. If you have it all figured out come back a year from now and toot your horn. Show us all how smart you are and we will listen and respect you forever. Not.

[cos10000]

WFC is actually a shill for Mel Karmazin, to defend this financially struggling company. I just had my source confirm WFC's IP address. It's sad that these desperate apologists for satellite radio are allowed to impose their misguided political agendas on message boards such as Seeking Alpha.

[tooncat]

Mike;
You are just wrong. There is no "free internet". That fact completely defeats your thesis.

[quixsilver]

I like the contrasting points of view - gets me thinking in-depth from all sides. It's necessary for a balanced and rational personal point of view. How can you maintain a balanced perspective if you're leaning too far either way? It's easy to get caught up in the rhetoric on both sides. Thanks to all for their analysis and comments...

[Scot's Slant]

I've seen and read enough. I think it's time to go back to writing some country western songs that will be heard on Sirius/XM post- merger future. And oh, I almost forgot, there is one more thing: If anybody cares to help write those songs, Let me know....
Scot's Slant.

[cos1000]

Hey folks another day of blah, blah, blah, from the "Vicor of whatever". The Vicor's right, We're wrong, we're invested in Sat Rad, The Vicor's not.

He told me on a prior post that my investment decision were poorly chosen becuase I too quickly jumped to conclusions in identifying him as Dave, another personna he uses on Baron's articles. You see after the same monologue that he is providing here, "Dave", the Vicor, when questioned by me, had already told me he wasn't invested in these stocks. He was saying the same things, and adding nothing to the analysis of the business model for Sat Rad. just continuously criticizing our investment choices. What would be his motivation for investing all this time on boards discussing stocks he's not invested in? MMMMMMM. Now here he is as "Vicar of Blah, Blah, Blah", admitting that he is not invested in either of these companies. I am not addressing this to The Vicor, Dave, or whoever you are as you try to incite these boards. I am simply cautioning folks to beware of wasting to much time with the dribble or the dribble of the author of this article, using a 3 year old analysis. That was before a merger announcement, when these two companies were killing each other with competition. No numbers in the article and Internet Radio in the car is the replacement For SAT RAD.......Please.

[cos1000]

Just for the record. I have read these companies 10K and their 10Q each and every time their released. I am long Siri and currently do not own any shares of XM. My most recent purchases of shares was 10,000 Sh of Siri at 2.01 and then 2000 sh at 1.85. My average cost per share is 2.34.

[cos1000]

correction 2000 sh at 1.86

[Merger Mania]

Vicar of Value...I think you've become a very sad excuse as an ardent hack for the NAB and Georgetown Partners. Why do you think the NAB has spent millions fighting against this merger?? If satellite radio is ready to go down the toilet, then why don't these organizations at least have half the common sense that you have, and quit spending their time, energy and money fighting against this presumably failed merger between these two companies??? Can you give me one good answer? Why do they waste their valuable time, energy and money fighting the merger? Why do you come here and waste your time and energy? What's your agenda??


On Jun 29 01:25 PM Vicar of Value wrote:

> WFC is actually a shill for Mel Karmazin, to defend this financially
> struggling company. I just had my source confirm WFC's IP address.
> It's sad that these desperate apologists for satellite radio are
> allowed to impose their misguided political agendas on message boards
> such as Seeking Alpha.

[pmello]

2% is high churn? You might want to see what the churn rates are for cell carriers, or cable television companies. It is much higher than 2%.

[oceanspat]

Its very clear that the bashers shorts do not own a sirius or xm radio in the home or car . I've enjoyed my Sirius programing up n down the coast -can choose what I want to hear anytime I want-take terrestial FM and AM back to what ever. I always womdered how long they took to buy a Laptop or PC---probaly still own VHS tape movies....Negative shorts ---what a life ---

[Seamless82]

I am amazed at the level of ignorance bashers of Sirius and XM have. This whole article was essentially a rant about how good and brilliant the author is, how terrible XM ans Sirius are, and how stupid satellite radio investors are.

I love the stock market. I can look for value in all sorts of places. If everyone was touting the praises of satellite radio, the valuation would likely be unrealistic. However, the is a disproportionate number of bashers that have managed to pummel this stock into the dirt.

Do you ever stop to think, Sirius and XM have a proprietary satellite network...in orbit! Soon, they will have joint access to the 25mhz spectrum, opening up limitless possibilities!

You have not followed these stocks for three years.... Well then you may not know that both companies have combined subs of nearly 20 million! Do you know what number is considered a national market, looked upon by large advertising firms? The experts in the ad industry...

Lets look at price elasticity of demand. It's a simple economic term. If you took an econ class, you'd likely know it. I would guess Sirius and XM do not have inelastic subscribers. Therefore, there is elasticity in the SDARS business model. The Al La Carte is very likely to drive retails sales. I recall hearing that the iphone price reduction is likely to double or triple sales. Apply this logic to Satellite radio! Then consider for a moment that some households have multiple subscriptions!

IN MY WORDS, AND MARK THIS COMMENT, WALL ST. GET READY FOR THE EARLY MAJORITY IN SATELLITE RADIO.... WE'VE HIT CRITICAL MASS AND THIS THING IS GOING TO ERUPT!