Perhaps like you, I was drawn to Rich Duprey's "Why Satellite Radio Will Fail" article like a moth to a flame war. Even though my once-bullish perspective on satellite radio has started to fade of late, I wasn't ready to suit up as a pallbearer for the heavy coffins of XM Satellite Radio (Nasdaq: XMSR ) and Sirius Satellite Radio (Nasdaq: SIRI ) .
Sure, growth is decelerating. It's a challenge to sign up boatloads of new gross subscribers while membership churn cycles result in fewer net additions. Emerging technologies are hitting close to home. The satellite-radio promise has fallen short in many ways, but death isn't the inevitable destination.
Satellite radio can't die. Common sense won't let it happen.
You, me, and Duprey
I have to credit Rich for choosing his daggers well. Too many critics knock the red ink, decaying growth rates, and cash burn rates as reasons to eulogize. My sharp fellow Fool -- and we've both been Fools for a long time -- went for the jugular in knocking the quality of satellite radio.
Nice shot. If something isn't very good, folks won't pay a premium for it. If someone is going to invest in a receiver and pony up as much as $13 a month for access, it had better be pretty good.
Rich boiled his bearish case down to satellite radio's shortcomings as a pay service:
- Limited playlists.
- Annoying DJs.
- Lousy reception.
I have been a Sirius subscriber since 2004 and an XM subscriber since 2006. Like Rich, I went with Sirius in anticipation of Howard Stern's eventual arrival. However, when I bought a General Motors (NYSE: GM ) car last year, I went for the 90-day XM trial and had to renew. With the Ron and Fez show in the afternoon, the better selection of comedy channels, and the ability to track live baseball scores, I was hooked.
Are the playlists limited? It's by design on some stations. However, the very nature of commercial-free music channels means that you are going through more tracks in any given hour than you would with ad-packed terrestrial radio. Would you rather hear less Hinder and The Carpenters if it meant wedging in commercials? I doubt it.
As for annoying DJs, I'll agree that they can get a bit chatty, especially on Sirius. Sometimes the hosts are the main attraction, like the raspy Wolfman Jack or the surprisingly provocative Bob Dylan. Still, there are several channels -- on both XM and Sirius -- that lay off the disc-jockey filler. Each service has about 70 music stations, so it's easy to find the genre you want, served up the way you want it.
As for the lousy reception, I know it's not perfect. Satellite radio has grown at the automaker level and languished at the retail level, because home-based systems can be tricky when it comes to getting a strong signal. Premium cable and satellite television are built for the home, though satellite radio has the road-warrior commuter at heart with its in-dash receivers and edgy portable devices.
As a radio junkie, I know that I can't take a long road trip without my satellite radio. Pre-satellite radio, I suffered through repetitive mix tapes and stations that were only good for a hundred miles or so. Sure, companies like Apple (Nasdaq: AAPL ) and SanDisk (Nasdaq: SNDK ) are putting out great digital-music players that provide variety without having to juggle CDs, but they lack the spontaneity of live radio.
The long road to success
It's easy to paint the merger between XM and Sirius as a lose-lose situation. If the deal is nixed, it will force the companies to continue to bleed red over redundant operating costs and cutthroat marketing expenses. If the deal gets approved, it's because the regulatory hurdles were cleared after the introduction of new technologies -- like Slacker or the Wi-Fi-enabled pairing of SanDisk and Yahoo! (Nasdaq: YHOO ) -- that proved to be satellite-radio moat obliterators.
I prefer to see things a different way. Many of the original threats to XM and Sirius appear to be fading away. Remember when it was Internet radio and the iPod that would spell the end of satellite radio?
What happened? Go to Live365.com, and you will be prompted to go to SaveNetRadio.org to voice your displeasure over the high royalties that will be coming due this summer. These may very well drive small webcasters out of business, dramatically whittling down your choices there.
The iPod is still a force, of course, but no collection of digital music and podcasting will supplant satellite radio. Now that legal downloads are cool again, it's an easier value proposition when you stack 13 new iPod tunes against a month of unlimited satellite radio. Sure, music-subscription services like Napster (Nasdaq: NAPS ) offer a competitively priced smorgasbord of music, but where is the marquee spoken talent?
There is a reason why Stern moved to Sirius and Oprah Winfrey went to XM. Satellite radio is the only talk format that can pay their salaries. Sure, syndication through terrestrial radio works for many mainstream celebrities, but what about the future? If radio fans continue to flock to satellite radio and portable media players, terrestrial radio won't be able to pay its stars for too much longer. Sure, Don Imus will eventually wind up on satellite radio because he doesn't have much of a choice, but others will ultimately migrate to the platform that can offer financial security.
It's the network effect in all its glory. Celebrities will flock to XM and Sirius because that's where the money is. Fans will come over because it's where the stars are. You saw it happen in television. The transformation has proved to be a bit bumpier in radio, but failure is not an option. Success is inevitable.
Yahoo! is a Motley Fool Stock Advisor recommendation. You will find fresh playlists, endearing DJs, and a welcome reception at the stock research service. A free 30-day trial subscription will prove it.
Longtime Fool contributor Rick Munarriz is a fan of satellite radio and subscribes to both services. He does not own shares in any of the companies in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.