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Let's Get Sirius

The history of satellite radio is short. The potential is huge. Sirius has an uphill battle in establishing itself as a worthy alternative to market leader XM. Yet the company will need to differentiate itself to stand out. Rick Aristotle Munarriz thinks that it is still possible, though time is short when the cash burn is huge.

By Rick Aristotle Munarriz (TMF Edible)
February 13, 2004

I want to get Sirius (Nasdaq: SIRI) for a moment.

I want to like the company, root the stock on, and share in the potential wealth of riding this satellite radio specialist to the moon.

There's just one problem: I don't get Sirius.

As far as believers go, I was an early riser. I pitched my tent and camped out months before the company even started signing up subscribers to its just over 100 channels of digital radio. I was pumped about the prospects of satellite radio when I wrote The Spirit of Satellite Radio two years ago. Even before that, I singled Sirius out as a recommended stock in my original Ten Stocks Under $10 column back in 2001.

Oh, I got Sirius then. I just lost it along the way.

It appears that I'm not alone. Tons of people start to believe or lose faith in the company every trading day. With a float nearly equal to its staggering sum of a billion shares outstanding, 60 million shares are being exchanged daily. In other words, the typical roundtrip between infatuation and ultimately kicking Sirius to the curb lasts for all of a few weeks.

But let me stop the rowdy lot hanging at the Sirius message board on Yahoo! (Nasdaq: YHOO) from packing vile to sling my way. For starters, they can do it in the air-conditioned comfort of our own Sirius discussion board. But, just as important, I want to go on the record as a believer of the medium.

It's easy to understand the lure of satellite radio. Just as cable television revolutionized the vanilla-swirl programming world of rabbit ears and network broadcasters, Sirius and rival XM Satellite Radio (Nasdaq: XMSR) offer the aural equivalent. Name the audio niche and either company's got you covered with round-the-clock servings.

While that cable bill of yours is bulging to the tune of $40 to $50 a month for basic televised content, satellite radio is cheap by comparison. XM will run you just $10 a month, while Sirius charges three bucks more. Just put up a couple hundred bucks for a quality receiver and you're good to go. XM and Sirius have pretty similar products. Each one offers just over 60 commercial-free music streams, with the balance devoted to everything from syndicated talk radio to news.

The companies have come out with portable receivers and home stereo solutions, but they realize that their target audience remains folks on the move. Truckers and commuters made up first wave of pioneers. Lining up automakers as investors and distribution outlets has played a major part in educating the consumer.

While the biggest push may come as more car manufacturers make satellite receivers standard equipment rather than factory-installed premium-priced options, even the coming of crisper traditional free radio won't get in the way of the sector's claim to ubiquity. People will pay for specialized content. They always have. They always will.

You can stream Sirius on some Penske and Hertz car rentals. XM has Avis. Sirius is tapping boat and RV owners, while JetBlue (Nasdaq: JBLU) and AirTran (NYSE: AAI) will start offering passengers XM's streamed offerings later this year.

The pie is there. It can feed two. But how thick a slice can Sirius carve here? While both companies have made financing moves to doll up their balance sheets, you need a good personality to go with the fiscal makeover. Sirius has a lot of ground to cover if it wants to catch up to XM, and it's got an uphill battle in justifying why its service is worth 30% more than the competition's.

Sirius closed out 2003 with just 261,061 subscribers. More than 9% of those listed subscriptions are coming from the Hertz side, where the average monthly revenue per car was just $2.65. That's a far cry from the $11.99 the company was receiving a month from its typical subscriber last quarter.

On the other hand, XM closed out the year with 1,360,228 million subscribers. The company's lead over Sirius continues to grow as XM gained 430,580 new subscribers this past quarter -- nearly twice as many as Sirius attracted all year. With XM looking to close out the year with 2.4 million subscribers and targeting 20 million users by 2010, how much farther back will Sirius be left in the dust?

Last year Sirius lost $313 million on only $12.9 million in revenues. XM lost $584.5 million on $91.8 million in revenues. The losses are substantial, but it's the price upstarts have to pay to attract long-term customers. XM had a head start, sure, but now the companies are on a more level playing field. They have carved up the carmakers into two substantial squads. Head out to Best Buy (NYSE: BBY) or Circuit City (NYSE: CC), and you'll see both companies pitched side-by-side.

That's what has to be so disheartening for Sirius. The more the country is being educated on satellite radio, the wider the lead grows for XM. Sirius has to differentiate itself -- in a good way. How can it justify costing more yet lack water-cooler panache?

"If my competitor were drowning," McDonald's (NYSE: MCD) pioneer Ray Kroc once supposedly said, "I would stick a hose in his mouth and turn on the water."

Maybe that's why XM went commercial-free on its music stations this month. It was pretty much the one bargaining chip in the current marketing arsenal for Sirius. Now, that ammo is little more than a round of blanks.

But before giving up on Sirius, let's go over two shots that the company has yet to fire. The first won't work. The second one might.

Taking a page from DirecTV's playbook, Sirius signed an exclusive deal with the National Football League. In exchange for $188 million in cash and $32 million in stock over the next seven years, Sirius will have the broadcasting rights to all of the league's games. It may sound brilliant at first. Yes, it was the NFL Sunday Ticket that put DirecTV on the map. But why was it such a huge success? Right. It's because folks tend to stay home on Sundays.

There are no long office commutes on Sunday afternoons. If you do happen to be driving around, you will always find the home team on free local radio. This is a limited, yet costly, tease. While Sirius also hooked up with the NHL and NBA, these are smaller deals and, while most games are played in the driving lull of night, it's not on the same gambling level as the gridiron fumble.

So what might work? By the summer of next year, Sirius expects to launch video transmissions. It will initially roll with a few channels of children's programming. The cynical objection is not lost on me. Truckers on cross-country hauls and long-distance lone-wolf commuters have no use for eye candy. Yet the very notion that video programming is available on that next family road trip or that the format will make headway in the cozier home and boombox market may give satellite radio the ability to penetrate the market further as well as provide it with the flexibility to justify a pricing premium.

Sirius will need that, because it has to vindicate its market valuation. While neophyte investors see Sirius trading for $3 a stub while XM trades in the $20s, because of the huge amount of Sirius shares outstanding it is valued at a cool $3 billion. XM, despite achieving many times over what Sirius has accomplished so far, is valued at a more reasonable $3.5 billion.

Sirius better get started. After all, I haven't exactly given up hope that I may eventually get Sirius again.

Rick Aristotle Munarriz thinks that streaming music off geostationary satellites in orbit is out of this world, dude. He does not own shares in any company mentioned in this article. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.
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