Dueling Fools: Serious Sirius

We're dueling over satellite radio here on Fool.com. Seth Jayson thinks XM will win this battle, while W.D. Crotty says not to sell Sirius short. Read both articles and then vote for which argument you think is better.

The potential of satellite radio is staggering. More than 15 million new cars and 7 million aftermarket radios are sold every year. When you add in homes, boats, and anywhere else a quality, commercial-free radio broadcast would hit the spot, you see why there is so much excitement over satellite radio.

The landscape
XM Satellite Radio (Nasdaq: XMSR  ) started first and has more than 1.6 million subscribers. Sirius Satellite Radio (Nasdaq: SIRI  ) , with just 351,663 subscribers, is growing quickly and just starting to get its sales force in place.

But don't let subscriber numbers convince you that XM has won the race. In the stock market, where investors vote with their money, the capitalization of XM is $3.9 billion, while upstart Sirius sits at $3.6 billion. Clearly, the head start XM enjoys is not highly valued. Sometimes the market is wrong, but might there be cause to believe Sirius will grow rapidly and overtake XM?

For differences between the two rivals, look no further than their capital structures. XM has cash of $385 million and debt of $693 million; in other words, a net debt of $308 million. Sirius, meanwhile, has cash of $707 million and debt of $426 million, for a net cash position of $281 million. Still, as Sirius' cash position eventually fades -- as it no doubt will -- the pace of growth and the cost of adding new subscribers will determine which, if any, succeeds.

Content is job No. 1
Entertainment businesses win or lose on content. Sirius is serious about content, and has so far clearly won the three-letter game -- NFL, NBA, and NHL. If it's these major league sports you want, and you want them on satellite radio, Sirius has them exclusively. But the real kicker may not be sports or even NPR (another three-letter biggie) -- it may be video (which, to be fair, is still not priced and is fighting its way through the regulatory maze).

Nonetheless, at the latest Consumer Electronics Show, Sirius unveiled a system that can handle video. For anyone with children, this may be a relatively easy sell -- and a way for Sirius to goose average revenue per customer. Why not let the driver enjoy the radio, while the kids enjoy three or four children's programming channels? The video service is targeted for launch in mid-2005.

Where sales are made
Sirius may have a one-two sales punch -- sports radio and children's video. But it is where the products are and will be sold that may surprise many. Just like different brands of electronics are sold out of the same store, XM and Sirius will likely share critical sales channels.

Best Buy (NYSE: BBY  ) and Circuit City (NYSE: CC  ) already sell both companies' auto and personal portable units. Starting this month, XM provider Wal-Mart (NYSE: WMT  ) will begin selling the Sirius boom box. In time for the first NFL kickoff, XM provider RadioShack (NYSE: RSH  ) will also begin offering Sirius.

Clearly, selling subscriptions takes one-on-one face time. It is easy to surmise the first question the rep will ask: "Are you interested in sports?" As the video offering nears, that rep might also ask, "Are you interested in video for your children?" Likely, these easy differentiators, not a breakdown of the 110 channels at Sirius and 120 at XM, will launch the sales pitch. In time, those two potent questions may allow Sirius to overtake XM.

Let's talk price
Remarkably, there are ways in which XM is already imitating Sirius. From the start, Sirius offered commercial-free music. In February, XM converted to this format. If flattery is the most sincere compliment, then consider Sirius complimented! Not explained in the move was why XM pricing remained at $9.95 a month.

After all, Sirius charges $12.95, and XM was to make up the difference with advertising. With advertising off the table, and Sirius offering an equally strong lineup, XM has to wonder what it will do if Sirius ever pulls up even in subscribers. Let's say that number is 3 million. That $108 million in additional revenue Sirius would earn -- for the same customer base. That is a strong competitive advantage if it materializes. As will be video revenue when it starts to flow.

The auto companies
Sirius has exclusive deals with Ford (NYSE: F  ) , DaimlerChrysler (NYSE: DCX  ) , and BMW. These three control 40% of the new car and light truck market in the U.S. By the end of the year, the company expects that its radios will be offered in more than 80 models from these companies.

These auto deals are no small potatoes. General Motors (NYSE: GM  ) has been aggressive in selling units and XM has benefited handsomely. With Ford and Daimler finally entering the race, Sirius should see significant benefits. The Daimler deal alone is expected to add 550,000 customers over the next two years.

As for getting satellite past the early adopters and to the people, Sirius radio is offered in 29 vehicle models at Hertz locations in 53 major locations.

Meanwhile, owners of GM cars and Hondas -- both XM exclusives -- can add a Sirius tuner and antenna that grabs the Sirius signal over any in-dash satellite-ready radio. Though to be fair, XM is not overlooking Ford or Daimler. Kits are available to convert those cars to XM. This is war, but clearly, Sirius is a big enough threat that XM is maneuvering.

Down to the wire
Sirius is just getting up to speed. The company expects to reach 2 million customers and break-even cash flow by the end of 2005. With higher monthly subscriber rates, exclusive content, and an interesting video option in the works, the surprises might be positive for shareholders.

And while satellite radio junkies note that XM is adding new subscribers at $106 each while Sirius is breaking the bank at $248 apiece, don't forget that as XM scaled, its cost of acquiring customers fell. Or that it has enjoyed strong support from GM. In time, Sirius will see its own acquisition costs fall, and it will enjoy support from Ford and DaimlerChrysler.

Again, there is surprisingly little difference in the market capitalization of the two rivals. For all this do-or-die talk, I would contend that if the potential subscriber market is 20 million in 2010 (as some estimate), there is enough to go around for both to prosper. Assuming, of course, they can get through the financial fits of start-up.

The bottom line
Assuming that Sirius manages just 40% of the market -- and video produces nil -- total revenue, at an average $11.90 per subscriber, would be $1.2 billion. XM Satellite, meanwhile, would bring in $1.3 billion at $9 a subscriber. Clearly, that pricing difference is a big equalizer. If sales fall 60% in Sirius' favor, revenue would be $1.7 billion for Sirius and $864 million for XM. That's a big difference.

Sirius is the premium-priced product with what appears to be premium content. Trying to guess future sales and adoption rates is an interesting exercise. Unfortunately for shareholders of satellite radio companies, that guess is about all you've got -- at least until visibility improves and results become more focused in 2005.

Invest at your own risk; write off Sirius at your own peril.

Next -- Read Dueling Fools: XM Dishes It Out and then vote.

Fool contributor W.D. Crotty does not own any of the companies mentioned. The Motley Fool has a disclosure policy.


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