Forget Pandora, Will Clear Channel Crush Sirius?

Includes: IHRTQ, SIRI
by: Rocco Pendola

For several reasons, it pains me to write this article.

  • I am a Sirius/XM (NASDAQ:SIRI) subscriber. I subscribed for two reasons: Howard Stern and Bruce Springsteen. While I only check into Howard's show occasionally, I listen to E Street Radio for about 12 hours a day on most days.
  • I love Sirius/XM CEO Mel Karmazin. As a pre-consolidation, pre-satellite radio guy, it's tough not to. Stern would vouch for this: Karmazin always put the talent first during his terrestrial radio days.
  • I am long SIRI. I view it as an interesting speculative play. I think it has upside ... to a point. While I see $3 to $5 in the next one to three years, I don't think SIRI will ever trade for a sustained period above $5.
  • As a former radio guy, I'm not a big Clear Channel (CCMO.PK) fan. In my estimation, they trashed radio with many of their initiatives, namely the idea of voicetracking, which involves allowing hosts to pre-record entire radio shifts for multiple stations. Oddly, Clear Channel will be the company to dig old-school radio out of the ditch.

Clear Channel Media and Entertainment Chairman Bob Pittman did an excellent interview with CNBC on Tuesday. It should come as no surprise that SIRI sold off on Tuesday. Pittman addressed Clear Channel's purchase of digitial music company, Thumbplay. Of course, the headlines generated centered around how Clear Channel plans to offer Pandora-like service by letting users of its iHeart Radio platform create their own customized playlists. As Pittman explained, Clear Channel has the upperhand on Pandora, given that the company's properties already reach 228 million radio listeners every month.

While radio has feebly reacted to new media offerings, ranging from iTunes to Pandora to Sirius/XM, for most of the 21st century, Clear Channel now plans to attack. Pittman notes that, unlike Pandora, Clear Channel can promote digital radio to its built-in audience. And it's not just local stations making the pitch, Clear Channel can also leverage the reach of its stable of national radio celebrities, including Rush Limbaugh and Ryan Seacrest, to advocate its digital offerings. According to Pittman, just three percent of listeners use digital radio; the rest go the old-fashioned way, leaving plenty of growth potential. Lost in the talk of Clear Channel's Pandora copycat was something just as big. It's a certain body blow and potential death knell to Sirius/XM.

Even though CNBC focused on it with Pittman, the media has largely ignored what I think is an equally amazing part of the entire iHeart platform. As a kid, I remember staying up late, night after night, listening to radio stations from across the country. From my bedroom in Niagara Falls, New York, I could listen to Ed Tyll on the old WLUP-AM, the Loop in Chicago, Steve Somers smoozing s-p-o-r-t-s, overnight, under the covers on WFAN in New York, and Imus in the Morning on the Fan, just to name a few. Adding to the nostalgia is the memory of the static that went along with tuning in these signals, which were highly unreliable. And I could not listen during the day or to out-of-market FM stations. Terrestrial radio didn't and still doesn't allow for it. I dreamt of the days when I could listen to any station in the country without having to be in its city or take advantage of a 50,000 watt AM signal that could travel hundreds of miles every evening. I have lived to see that day!

All hyperbole aside, it's pretty big, and combined with options such as Pandora, I am not sure why Sirius/XM needs to exist. Unless you have an attachment to Springsteen or Stern or Dr. Laura (yes, some people do), why in the world would you pay money to be a Sirius/XM subscriber? The service offers very little of value when you consider that Clear Channel will allow you, as Pandora now does, to create playlists based on your musical tastes. Certainly, Sirius may offer this feature one day, but it won't be free unless they change their entire model. And now, with Clear Channel, an entire world opens up to digital radio consumers. If you are one of the millions of Ryan Seacrest fans from across the country, you can tune into his local morning show heard on KIIS-FM in Los Angeles. If news breaks in Miami, you can dial up 610 WIOD. Given the number of stations Clear Channel owns and the number of markets it is in, the possibilities are virtually endless.

Clear Channel is finally doing what radio companies should have started doing years ago. They are innovating or at least following the innovators with aggression, as opposed to sitting back licking their wounds.

How to Play It

I am not sure I would play it, at this point. As mentioned, I am long SIRI, but I am not married to the company. I own SIRI January 2013 $3 call options. I have held them for a while. I think the stock has some pop in it over the next six to 12 months. When it happens, I will be more than happy to sell for a profit. I would not want to get into too long-term of a relationship with Sirius/XM for the same reason I would not want to with Clear Channel. Both companies need to clean up their balance sheets. According to Yahoo! Finance, Sirius carries $3.22 billion worth of debt; Clear Channel has close to $21 billion. While Sirius has admirably improved its debt position, it still remains a concern. Clear Channel has more cash -- $1.95 billion versus $587 million for Sirius. And, Clear Channel produces far more revenue -- $5.87 billion worth compared to $2.82 billion for Sirius. And what happens to Sirius's revenue figures when subscriber growth hits a wall?

If I had to guess which company will be around -- or at least not bruised and battered, unrecognizable to themselves -- five years from now, it's Clear Channel, hands down. They have the platform in place to not only bury Sirius, but Pandora as well before it even gets off of the ground post-IPO. And unlike Sirius, who could fall by the wayside without anybody south of Beth Ostrosky and a few Springsteen geeks noticing, Clear Channel is simply too big to fail. If the financials falter, suitors will line up to take the company's radio properties off of its hands.

Disclosure: I am long SIRI.