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Ad-Supported Satellite Radio Possibilities

|Includes: Sirius XM Holdings Inc. (SIRI)

My latest article regarding the potential of Sirius XM to broadcast both a premium as well as, simultaneously, an ad supported satellite radio service brought about a feverish debate. Many of the initial responses I received were not so much against the idea as they were against my own perceived lack of understanding as it applies to FCC regulations. Some it seems, are under the impression that the FCC has somehow banned Sirius XM from broadcasting in an advertiser supported format.

I didn't write an article, per se. I reported news that had been given to us freely by an insider of the company and by a person with the knowledge of an insider; Greg Maffei. Mr. Maffei not only stated that this will occur, he referred to it as the next leg of growth for Sirius XM. In answer to not my own, but Mr. Maffei's critic's, I offer the following FCC response from the March 11th, 1997 Original Report and Order for SDARS:

" Flexibility for licensees to meet market demands is crucial and it may be that the viability of a satellite DARS service will depend on offering a mix of advertiser supported and subscription service. We find that a requirement that satellite DARS be entirely subscription is unwarranted. Mandating that providers charge for their services is not in the public interest and raises significant legal questions if done for the purpose of economic protectionism as advocated by several commenters."

Clearly, the FCC has left this door open. Ironically, no sooner had this information been revealed than outcries began singing the praises of Satellite Radio's commercial free music offerings. Apparently, something in my previous article was misunderstood and a few people seem to have translated this into meaning that Sirius XM would now be commercializing its subscription based format. Let me be clear on this.

The patented chip makes it possible to simultaneously broadcast both the commercial free premium service that nearly 20 million people have come to know and enjoy, while at the same time offer a certain amout of free satellite radio in an ad supported format to non subscribers. The patent abstract states:

A secondary satellite radio or broadcast channel is used to broadcast advertisement clips (e.g., audio clips) to a receiver for subsequent decoding and playback. The receiver is configured for different tiers of service, e.g., one that delivers substantially advertising-free content and another that delivers content that includes more significant amounts of advertising. The content delivered to both is the same content; however, for the service tier that includes more advertising, the advertisements broadcast on the secondary channel are interleaved into the content, preferably in such a way that the continuity of the content being delivered is not compromised.

Unused radios are a burden to the company as they have already been paid for through radio subsidies. These subsidies increase subscriber acquisition costs (SAC) and eat away at company revenues. They represent an investment with a zero return. Nothing would change for the premium content subscribers, if and when this should come to pass. The idea of course is to make those 10 to 20 million unsubscribed radios, profitable.

Position: Long SIRI