I read the article, and am somewhat surprised at the negativity with which the author addressed the Sirius issue.My own thought is that there is more to what he says than meets the eye-- does he know something very negative regarding Sirius that we don't? I myself think Sirius' management is very suspect-- but that is my opinion. Does this author of "Short Sirius" have information on some tehcnology aspect, e.g., about Sirius that he is not divulging? I do not agree with his assessment that only one SDARS can make it-- two good SDARS's could make it. I think the author said only one SDARS could nake it becuase if Sirius' tech does not work, as I suspect is doesn't, then there is in effect only one SDARS-- sc., XMSR. This is why I think the author knows something about Sirius' technology flaws that he is not divulging-- all IMO of course.
You make some good comments Malebranche. We haven't always seen eye to eye in the past, but I have to agree with you on the sentiment of the Fool article. In regard to Sirius' technology being flawed, I feel that this is entirely not true. If for some reason it comes out that Sirius has been hiding more issues than just the chip fiasco, then they desire to die ala Enron style. I will be in one of the launch cities on February 14th, that will be judgement day for Sirius.Jeff
does he know something very negative regarding Sirius that we don't?Oh, please.... *rolling eyes* The Fool writers know as much about Sirius as anything we do. Heck, I'm negative on the stock, but that doesn't mean I have any inside information either.I think the author said only one SDARS could nake it becuase if Sirius' tech does not work, as I suspect is doesn't, then there is in effect only one SDARSWhat does SDARS stand for?In any case, the author didn't say anything about Sirius's technology not working. He said XMSR may have gotten too far of a head start, and "If such a lead becomes evident, the second-place company will likely find its funding dry up at the same time that revenue from subscribers falls short."The problem isn't that their technology doesn't work, but rather the company will RUN OUT OF MONEY before it can turn a profit.It's a very valid concern, and I agree whole-heartedly.-- Ryan
What does SDARS stand for?Satellite Digital Audio Radio ServiceJeff
I wonder if they are paying attention to the fact that Sirius has exclusive contracts with more than half the car manufacturers out there.Howard
Hi Fools,This is my first post on this message board - or anywhere on this website. But, as an investment writer myself (see www.pirateinvestor.com) I have had the opportunity to judge the Fools' work as both an investor, a writer and a competitor.I was surprised they choose to short Sirius - because as I think I can show you clearly, the obvious greater risk is XM. Regardless of whether the technology catches on with the public, there's almost no way that XM shareholders can profit because of horrible, off-balance sheet obligations that XM owes to GM.Wall Street currently values XM at $1.14 billion. The competition garners a measly market value of about half that, $512 million. XM's much higher price comes from the strength of its “first mover advantage” and its relatively clean balance sheet -- two things the Fools pointed out.But the strengths of XM are just a mirage.Nobody knows for sure how fast subscribers will sign up for satellite radio. But I'm willing to bet it's faster than Wall Street expects, so in the spreadsheets I've drawn up to construct estimates for revenues, I'm assuming impressive growth: 100,000 subscribers by the end of this year, 250,000 by the end of 2003, half a million by 2004 and a million by 2005. After that I have big, but declining subscriber growth rates plugged in: 70%, 50%, 30% down to 20% per year growth starting in 2009 and continuing from there. My estimates, which I'd describe as aggressive, call for nearly four million subscribers by 2009, which as you'll see, is an important year for XM Radio Holdings. Next, to estimate revenues, I went looking for similar subscription/ad businesses. I took Adelphia Cable's revenues for my model. Adelphia earns a couple of billion dollars on 2.1 million subscribers, or $456 per year, per subscriber. Again, nobody knows how much revenue XM Satellite will be able to generate, but I'm going to assume that they'll earn 30% as much as Adelphia. And I think that's pretty generous — Adelphia operates as a monopoly in most markets and they sell high priced network services in addition to broadcast content. Adelphia has also spent years perfecting its ad sales business. XM will be starting from scratch in an unproven medium. As with all such models, you can move my numbers around and produce strikingly different results. But here's the thing: even if you assume that XM can achieve the ambitious targets I'm suggesting here, the company still won't make any money. Wall Street firms touting XM are quick to remind you that the firm is relatively debt free, especially when compared to Sirius, which has nearly twice as much debt as equity on its balance sheet. And that's true — when you're looking at a balance sheet comparison. But my dear and gentle Fools, these days, on Wall Street, the devil isn't in the details — it's hidden off the balance sheet. You see, XM Satellite Radio Holdings has promised to pay General Motors $35 million by 2005 and an additional $400 million dollars by 2009, in exchange for being the exclusive satellite radio service for all GM factory cars. That's a giant promise. According to my model, which assumed rapid subscriber growth and high per subscriber revenues, XM Radio's sales will only total $1 billion cumulatively through 2009. We don't know what profit margins will look like, but we do know that XM will have to pay 4-6% royalties to the RIAA (Radio Industry Association of America) for its music licenses. We know it will have to reimburse General Motors and several radio manufacturers for their investment in new radios and we know that it has promised GM a percentage of its gross receipts from the radios that GM installs. Nevertheless, let's pretend that XM Satellite Radio is a radically efficient business and that it's able to generate 25% profit margins — roughly three times those of more established businesses. Even then it will have only garnered — in total — $249.5 million dollars in profits by 2009. That won't be enough to pay off General Motors. And that's why I suspect that General Motors — which is already a large equity owner in the company — will eventually assume control of the company. My guess is that GM will do its best to get the rest of the company on the cheap, which is bad news for today's shareholders. If you're gonna short one of these stocks, shouldn't it be XM?Thinking independently of the Fools, let's consider that “debt-laden” competition, Sirius Satellite Radio (NASDAQ: SIRI, $9.65). Sirius has several competitive advantages over XM. First, unlike XM which will host advertising on all channels, Sirius promises to only host ads on its talk radio channels. The 50 music channels it will begin broadcasting on February 14th will be completely free of advertising. That's enough of a difference for me right there. I can either spend $10 per month and get ads with XM or spend $12 per month and get no ads on Sirius. Which would you chose? Second, unlike XM, which has two satellites in a geostationary orbit above North America, Sirius has three birds in a geosynchronous orbit. The satellites follow a figure eight path from the equator across North America and back again, leaving at least two birds over North America at all times. However, the widely different angles of the satellites helps to create continuous line-of-sight connections to the earth bound radios, almost regardless of ground clutter. Both Sirius and XM will build ground repeater stations to broadcast in tunnels and in the middle of core urban areas where skyscraper canyons make line-of-sight connections nearly impossible. But, Sirius will produce much better reception with its technology in a broader area and will require fewer repeater stations, making for lower overall network costs. Third, coming later to this market will prove to be a boon, not a disadvantage. It will take some time for consumers to learn about the new service, see it demonstrated and develop a desire for it. It's true that in network applications being the first mover and establishing a standard is incredibly valuable. But this isn't a network application. It's a broadcast application. And, in any case, the FCC has mandated that both companies' radios be able to receive either company's transmissions. In other words, there's no first mover advantage here. But there was a huge first mover cost — for XM. (By the way, the FCC's requirement that the competing systems be interoperable didn't arise until early 2000, nearly two years after the spectrum sale. Talk about changing the terms on a deal. That's like me selling you a house and then, two years later, making you invite your neighbors for dinner every night. There isn't a deadline currently for interoperability and it's plainly bad for both businesses. It's my hope that the FCC drops this demand or that it is thrown out in court). XM wanted to be first, so they've been spending too much all along the way, starting with the FCC license. XM paid $89 million. Sirius paid $83 million. XM has spent around $900 million so far to build its technology and establish operations. Sirius, just $444 million, or about half as much. Most importantly, by demanding to be first, XM set up Sirius to garner most of the new car market on the cheap. When XM signed an exclusive deal with GM, it forced the other car makers — Ford, DaimlerChrysler and BMW — to sign with Sirius. And while it cost XM nearly $500 million plus a % of sales to land GM, Sirius got deals with everyone else for no money upfront. In fact, DaimlerChrysler even bought $100 million worth of Sirius for $43.00 per share as part of its agreement. Now, if Sirius is successful, the car companies will get paid — in stock. They each have warrants for 4 million shares with strike prices that start at $30 per share. But these warrants aren't exercisable unless they've installed at least 4 million Sirius radios in their cars. GM, on the other hand, isn't even under any obligation to install the radios at all. So...what's the downside? Well Sirius does owe a lot of money to both Loral Space Systems for its satellites ($50 million) and a lot of money to Lehman Brothers ($150 million). It also has convertible bonds that come due starting in 2007 that prevent it from raising more money in the debt markets. Out of all of the debts, the Lehman Brothers loan is probably the most dangerous. However, payment on the note doesn't begin in earnest until March 2005, when 22.5% of the principle must be repaid. I'm not that concerned about the debt because Sirius will have radios installed in 44% of the new cars made in America by then — that's 4 million potential subscribers each year. And these subscribers will be driving Mercedes, BMWs, Volvos and Jaguars. That's exactly who is most likely to purchase a premium radio service — not your GM buyer going for the $2002 rebate on his new Chevy Cavalier. One more thing I like about Sirius' technology: the company can cut off your radio's ability to receive the satellite signal remotely if you don't pay your bill. Sirius recently raised another $158 million, pricing shares at $9.85. That will give the company, according to my calculations, nearly $400 million in cash. The company says that should be enough to see it through 2003, by which time, having proved its business model will work, it can raise more money at a higher share price. I don't expect the company to be profitable until 2005 — at the earliest. Remember: these kinds of broadcast networks require enormous fixed costs to build and establish, after which time they can deliver years of very profitable operations. Today you have the opportunity to invest in Sirius Radio for book value. Judging from its competitive advantages over XM (better reception, sold in better cars and no advertising), Sirius radio will become the standard satellite radio of choice. Despite what the Fools say.HofferFool"...the differences between the conservative and the radical seem to spring mainly from their attitude toward the future. Fear of the future causes us to lean against and cling to the present, while faith in the future renders us receptive to change." -- Eric Hoffer
Welcome Eric, you should post here more often. You are the first Sirius long I have come across, either here or on SI (we won't mention Yahoo) who has made a serious attempt to analyze their finances. I haven't followed this stock closely for a while, so I can't offer any serious rebuttal to your thesis. Your numbers look right (a refreshing change) but I remain skeptical that current Sirius common holders will ever see a profit. If I were a shareholder, I would especially worry about Leon Black, who will potentially have the power to put the company in bankruptcy and have them come out of it on his terms, something he has done in the past (e.g. Vail Resorts and Samsonite).I do believe you are wrong on one (relatively minor) issue that I remember from when I was following the company. You say:By the way, the FCC's requirement that the competing systems be interoperable didn't arise until early 2000, nearly two years after the spectrum sale. Talk about changing the terms on a deal. That's like me selling you a house and then, two years later, making you invite your neighbors for dinner every night. There isn't a deadline currently for interoperability and it's plainly bad for both businesses. It's my hope that the FCC drops this demand or that it is thrown out in courtIn fact, the FCC gave the companies an extension on the interoperability requirement, which was part of the terms of the original license auction, but which became an ongoing issue when the companies couldn't agree on the technology. For example, this is from the 1997 annual report.AMRC has proposed to use a different transmission technology from that of the Company. The IB Order conditions the Company's license on certification by the Company that its final receiver design is interoperable with respect to the final receiver design of the other licensee. The Company believes that it can design an interoperable receiver, but there can be no assurance that this effort will be successful or result in a commercially feasible receiver.. It seems to me that it is strongly in the interest of both companies to achieve interoperability. Failure to do so would, at the least, invite a challenge to their respective licenses when they are up for renewal at the end of the first 8 year period.
Listen Oliver Stone, not everything is a frickin conspiracy!!!Give me a breakcubby
Mark,Thanks for the compliment.I do plan on posting at the MotleyFool more frequently. I have my own message board, but my readership is tiny compared to the Fools' and I'd like to learn more from this community - like what you've just told me about the FCC. I didn't realize that interop was a requirement from the get go.Although I have recommended buying Sirius, my recommendation comes with huge caveats. This is the kind of thing that in ten years people will ask about saying "Why did you ever invest in that?" or "Why didn't you ever invest in that?" So...I think buying one of these two companies is worth 1% of your portfolio. In any case, it seems obvious that Sirius is a better risk than XM. I'm surprised that the Fools didn't agree.Porter
I like your post. It is intelligent and well thought out. However, I have three points to raise:1) There is no telling whether or not Sirius will be the better service (technically) until the units are out. You assume that what you hear from Sirius about the better angles means significantly fewer repeaters. That may turn out to be less true than you think.2) You say that by 2009 there is no guarantee that GM will continue to want XM. I must disagree. GM is a large holder of GMH (Hughes) and Hughes owns many shares of XM. I think that the relationship is sound.3) You discount any possibility tht XM and GM will work out some kind of deal for servicing the debt to GM. I sincerely doubt that GM would bankrupt XM in order to collect payment.I believe that these three factors my make XM more appealing than you give it credit for. Is is more appealing than SIrius, that's for the readers to decide. But your points about Sirius are thought-provoking. Sirius is very highly leveraged, so the shareholders reap more of the benefit if Sirius turns a profit. Of course that leverage has a bad side in that Sirius may be forced make many concessions in order to maintain the business in the short to mid term.
HofferFool,Thoughtful analysis, but there's one big hole: the subscriber #'s you suggest are WAY BELOW "what Wall Street expects." On 1/15/02 Ladenburg Thalmann forecast 10M XM subscribers and 8M SIRI subscribers on 12/31/09. Given that >100M new vehicles will be sold in the U.S. between now and then (~35M GM), your estimate (~4M for XM) seems very low on that basis. And, that does not even count the other 100M aftermarket vehicles...Whether your estimate of subscribers is right or not only the future will tell, but your positioning of your estimates is terribly (intentionally?) misleading.Yes, XM has a >$435M off balance sheet obligation to GM and, yes, that's a big chunk of $$. And, if XM has only 4M subscribers in 2009, the business is in deep doo-da. BUT, if XM becomes a "standard," like cable and satellite TV, then there won't be a problem -- and, that's all been figured into the story by "Wall Street."I'm not arguing XM is a better/ worse investment than SIRI, just that your analysis does not add much to what is already known... unless you have some well-founded/ analyzed/ researched basis for supporting your subscriber guesses.
First, unlike XM which will host advertising on all channels...Yes, XM has advertising, but not on ALL channels. There are thirty-some commercial free music channels, and those that have commercials only have about 1-2 minutes per hour. You really don't even notice them. The biggest advertiser thus far appears to be "rich, chocolately Ovaltine".The rest of your logic seems sound on this. I'll have to look more closely at my investments in this area...Kevin
HF,Nice first post with much thought. As a previous poster pointed out the glaring error is your sub estimate. You stated 100k in 02 and 250k in 03. These are WAY under the street estimates.XM signed up 30k in 45 days. Starting in August this year GM will have XM as a factory installed option in 24 different models with yearly sales totalling 4 million vehicles. In the 2 GM vehicles currently offering the XM option about 4% of people are opting for it. Mind you, this is before anyone really knows about XM. If you take say 5% of those 4 million vehicles thats 200k per year. This year would be half that cause 03 models start around August, so 100k minimum OEM installs this year.That says nothing about the aftermarket, which is where basically all the installs to date have come from. Even at a modest pace of 500 per day to match the current install rate thats 500*365=180k.180k aftermarket plus 100k OEM this year looks to me like 280k in 2002. I realize this seems like a lot relative to the other consumer electronics products you brought up. But lets face it, revolutions sometimes happen.Tomorrow is XM's conference call. 10 am EST, check it out on XM's website:www.xmradio.comTheir boss Hugh Panero will tell you how many subs they are forecasting for 2002, and also give current sub numbers. Expect guidance in the range of 300k to 400k by end of year 2002. Plug those numbers into your spreadsheet after the CC and get back to us. Seriously.Robert
In the 2 GM vehicles currently offering the XM option about 4% of people are opting for it.Hey, this is good stuff! Where'd that information come from? That's the first I've heard of it!-- Ryan
Robert -I didn't realize that my sub. estimates were so much below Wall Streets'. (Maybe my estimates are lower because I'm not trying to sell SIRI or XMRS shares...).I hope XMSR is right, that it is able to sign up, retain and collect monthly payments from 350,000 people this year. I'm a fan of radio (I don't watch television) and I'm looking forward to listening in my car. I currently listen to Sirius on my computer. But I will be amazed if XMSR has over 1 million paying subs in 2005. And, if it doesn't, I don't know how it will be able to pay GM the $35 million it owes, nevermind the $400 million it will owe four years later. Like I said, though, you can play with my model, throw different numbers in, and get wildly different results. Anyone who says they know what's going to happen with these companies is lying through their teeth. We don't know what the adoption and retention numbers will be like. That's the fun part.The point of my post wasn't to say that either stock is a good investment or a bad investment. My point was only that if you were going to short one of the two companies, XMSR is a better choice because it is three times more expensive than SIRI and because the company is on the hook to GM for a lot of money (>$435 million), without getting much in return. (GM isn't obligated to install any radios at all. And it could always decide that owning XMSR outright is better than getting royalties. That's scary for current shareholders).Also, I don't think being the first mover in this field is worth as much as XMSR had to pay to be first. I think it's more likely that XM's advertising will support Sirius' rollout. And I think the deals that Sirius was able to strike with GM's competitor's are much better for Sirius shareholders than XM's deal with GM.I've been a Fool reader and admirer for many years. I was surprised that the Fools didn't mention XM's off-balance sheet obligations. These obligations are what kept me from recommending XMSR as a speculative buy and what made me examine more closely the opportunity in SIRI. I came to believe that SIRI has the better chance at success.HofferFool"We can never really be prepared for that which is wholly new. We have to adjust ourselves, and every radical adjustment is a crisis in self-esteem: we undergo a test, we have to prove ourselves. It needs inordinate self-confidence to face drastic change without inner trembling."Eric Hoffer
And it could always decide that owning XMSR outright is better than getting royalties.I think that's a very unlikely scenario. That would be like Intel starting to sell computers instead of just the chips. If they did that, every other computer maker out there--Dell, Compact, HP, etc.--all of them will run to AMD for chips, and perhaps drop Intel chips completely. Why give money to your primary competition, right?In the same manner, if GM owns XM in whole, no other car manufacture would even consider installing an XM radio. And let's fact it, XM needs all the subscribers it can get. It would be a serious blow if no other car manufacture wouldn't even consider XM as an option.I do believe XM being bought out by somebody is a distinct possibility at some point in the future, but it won't be GM.-- Ryan
How can Sirius have better reception...no one has heard it yet. The reception issues are not a pertinent matter as both will transmit crystal clear sound. While XM's largest partner might be GM, they are also contracted with Honda, and Toyota will soon follow(GM and Toyota have a solid business relationship and brand a few of their models in Japan). Ford is currently cutting their workforce due to slowing sales. DaimlerChrysler is the only viable force at this point...eliminate the Jeep line and Diamler will again be one company. BMW does not even figure into the equation as they sell nowhere close to the amount of cars as the previous three mentioned. So where does this leave us?....50-60% of all the cars on the road will have XM service installed in it. The argument that only high priced car owners will have Satellite radio is a very shortsighted one. Just today on the XM conference call it was made clear that the chipsets that receive the signals is constantly being made smaller. This will significantly reduce costs and thus passed on to the consumer, where in time only the monthly fee will be all that is necessary. With this in mind XM has partnered with the correct brand names. So let's forget all the carmakers for a while. The aftermarket radio business is huge. Once again XM has strategically paired up with the three largest names in car audio...Pioneer, Sony and Alpine. Sony is the only one that makes an XM unit for the home. While Sirius is mainly focusing on the auto market XM see that the service will go far beyond just cars. WIth so many channels of music to choose from, commercials are not really an important factor either. At 6 minutes for every hour, it is hardly noticeable..and this is not on every channel either. As a matter of fact Sirius is already offering discounts on their monthly membership if you sign up for a year. The ad revenue is a crucial one in the radio business and Satellite will be no different. Currently only XM sees the potential in addition to subscriber numbers...in their most recent quarter revenue was $520,000, of which $290,000 was ad revenue.Lets assume the previously stated post was correct in his calculations, which would garner 1 million subscribers by 2005, and make XM a debt riddled company. XM has called for 350,000 subs by the end of this year. At this rate lets assume 5 million subs by 2005. Kind of throws everything out the window doesn't it? XM will remain of the two...shorting Sirius is the right long term call.
GM isn't obligated to install any radios at all. And it could always decide that owning XMSR outright is better than getting royalties. That's scary for current shareholdersBut isn't this also true of SIRI and Leon Black's Apollo Group?BTW, I tried listening to SIRI on the web and I was somewhat disappointed. The stations I listened too seemed kind of soulless to me. Nice music, but not exciting to listen to. Personally, I'd like to hear more from the DJ's and would like to see some better structured playlists. I'm a little surprised by the latter, Meg Griffin used to be one of my faves.FWIW, here are a couple of internet radio stations I find much more enjoyable:http://www.radioparadise.com/http://www.kpig.com/
Thanks for the recomendations Mark. I could not access either of them though. The sites must be down for maintenance.Does anyone else out there have recommendations for good Internet radio?SB
Once again XM has strategically paired up with the three largest names in car audio...Pioneer, Sony and Alpine. Sony is the only one that makes an XM unit for the home. While Sirius is mainly focusing on the auto market XM see that the service will go far beyond just cars. wicked,I am just beginning on this board after reading a link to it by Hoffer.I have to say I disagree with this for a good reason. Every home has a hook up to the internet either by phone line, adsl, or cable modem, so all radio stations accross the country can be channelled into every home for free and still have advertising to foot the bill. I should include satellite for the home as well in this. But the services for car are a different animal. If people are as willing to pay for this service as you and I believe than for the car it will be successful hopefully, but these same customers can get even more for free elsewhere for the home or office. Also other satellite companies can broadcast to businesses creating a damaging competition for SIRI and XM. The car radio and the satellite radio for the business are going to compete, but the business more often will be hardwired so satellite car radios will not be the general business model for stationary receivers. JMO...db
The following was posted on the Yahoo board some time ago. It illustrates another potentially important income stream for XM, and it demonstrates that hard-wired services like Muzak are in jeopardy of being displaced by XM satellite radio simply because XM is a much better value. http://messages.yahoo.com/bbs?.mm=FN&action=m&board=1600408765&tid=xmsr&sid=1600408765&mid=23869 The work out and cafeteria scene..... by: SMOKEYGEO Long-Term Sentiment: Strong Buy 11/05/01 11:21 am Msg: 23869 of 23961 I thought that some here would like to get a peak at the "non-conventional" market place for XMSR. The market place for now is significant but perhaps pales a bit when the auto OEMs come on board. Nonetheless it may be a bit undercovered here, now. The following is a posting on the DISH board from one of their valued regulars. He is an independent Echostar rep in New Orleans and does other audio/video work as opportunities arise. He has granted me permision to post his words here. You are going to find the title alien and you must realize that some of the background of why the thread exists relates to ongoing discussion of how the Hughes/Echostar merge affects the prior Echostar independent contractor's business. DISHMAN is one of the best sources of hands-on info there (DISH board) along with our KING. ----------- Re: The PARTY is over for contractors... by: DishMan5 (M/New Orleans) 11/04/01 01:25 pm Msg: 45989 of 45994 Yes, I have a couple of jobs set up for XM. In New Orleans we cant get the Sony house model yet. Should be out this month. Im doing a work out gym with 18 pairs of speakers throught the work out areas. Total cost of speakers and radio,$6100.00. The second job is smaller replacing a muzak system. XM only charges $29.99 for commercial. The cafeteria is now paying over $100.00 per month. I think XM will put a serious hurting on muzak unless they drop there prices to existing customers. JMO as always -------- Yes, there are going to be other subscribers and corporate agreements that weight out at far more than one subscribership per "vehicle" and that will prove/expose XMSR to the one sub at a time marketplace. Exposure! Exposure! Keep it up DISHMAN. Smokey
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