I'm Bearish on Sirius XM

I am bearish on Sirius XM Radio (Nasdaq: SIRI  ) . My Foolish colleague Rick Munarriz is bullish. And so we duel! Enjoy these two articles today. Come back Monday, when we'll face off again with our rebuttals.

If content is king, and I think that it is, then Sirius XM is in trouble. CEO Mel Karmazin isn't going to be able to keep the content that keeps subscribers. The math simply doesn't work.

When Stern gets Sirius
When I say, "the content that keeps subscribers" I'm talking about Howard Stern, a $100 million a year shock jock who is easily the company's most important on-air personality. (Sorry, Oprah.)

Stern's contract expires at the end of 2010. Between now and then, Sirius XM will likely divert some of the millions it needs to repay Liberty Media (Nasdaq: LINTA  ) to fend off threats to its subscriber base. Web radio is already positioned to take its pound of static.

And while it's interesting that Stern will soon broadcast to your iPhone, Ford (NYSE: F  ) and General Motors (NYSE: GM  ) have made it easier for drivers to use Apple's (Nasdaq: AAPL  ) iPod as a substitute for terrestrial or satellite radio.

There's also Microsoft's (Nasdaq: MSFT  ) Zune and Sony's (NYSE: SNE  ) new Walkmans. Neither is as popular as the iPod -- and the Zune has had its share of issues -- but they are alternatives to radio, slick devices for playing downloaded tunes.

Substitutes are everywhere.

Sirius math
Yet each of these services and platforms pale because they lack Stern. He knows it, too, and he's not going to settle for less than the $100 million he's getting now. More likely is that Stern will ask for a raise. After all, he deserves it.

Then-Sirius Satellite Radio had 662,289 subscribers the week before Stern announced he'd be leaving Viacom for the upstart. Today, Sirius XM serves more than 19 million listeners. Even if you attribute half that total to XM subscribers who have stuck around, that's still 9.5 million Sirius listeners. Many (most?) of them pay to hear Stern, who regularly commanded an audience of 10 million when broadcasting via terrestrial radio.

What would happen if Stern left for Web radio? What if he set up his own private studio, struck a deal with a Web hosting company, and started broadcasting under his own brand, independent of Sirius XM or any other media conglomerate? Would you pay $1 a month to listen?

Most would, I bet. Drawing an audience of 9 million -- less than half of Sirius XM's current subscriber base and less than what's he's drawn historically via terrestrial radio -- would bring in $108 million in annual revenue, an $8 million raise.

Sirius options
My point is this: Stern has options. So do most of Sirius' content suppliers. Take Major League Baseball (MLB). Sirius pays some $60 million to broadcast games during the season. If it doesn't have the cash to renew, baseball's executives could broker new deals with terrestrial stations and turn to the Web for the rest.

In fact, they already are. MLB last week released an application for the iPhone that, for $10 for the season, will deliver live Web radio game feeds for all 30 teams. Video clips and live score updates are also included. Sirius XM charges $10 a month for a similar service.

Ouch.

Skeptics will argue that the Web isn't much of a broadcast platform and, to a degree, they're right. Some Americans lack broadband Internet access. Satellites cover more territory.

But that's changing. President Obama has committed $7.2 billion to expand broadband Internet access in the US. Upstarts and giants alike are bound to line up to grab a slice of stimulus pie with the net effect being an expansion of broadband capacity. Wireless broadband, in particular. And that should aid emerging technology such as WiMAX, which can broadcast wireless Web signals over miles.

Will Stern turn to the Web? That's really not the point. The point is that he could, and that, if he did, he might make more money than he does now.

If that's not a serious threat, I don't know what is.

Read Rick's bullish argument on Sirius XM, and come back on Monday for the rebuttal arguments.

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Tim had stock and options position in Apple at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy needs another cup of coffee. (Yawwwwwwwn.)


Read/Post Comments (24) | Recommend This Article (17)

Comments from our Foolish Readers

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  • Report this Comment On April 03, 2009, at 5:30 PM, DollTV wrote:

    That's the best you could do? Wow. Stern is on the air a limited portion of the day, so subscribers have a lot more to listen to with Stern. He won't do his own thing. He'll do what Shatner did with Priceline. They were left for dead, and now the stock is vibrant. And Shatner is vibrant.

    Besides, you fail to mention that Fox News and FBN is all over Sirius XM. And a considerable amount of their cable/satellite programs feature Sirius XM guests.

    I'm surprised neither Fool notes these--focusing on Stern and Oprah.

    You're missing a lot.

  • Report this Comment On April 03, 2009, at 5:30 PM, splintar wrote:

    Limited, one trick argument.

    If content moves anywhere it will still cost to access it.

    Sat Rad is the volume king of organizing content with the best delivery method and the most OEM installs.

    Now it also has the capital.

    And things like Pandora and Slacker are about to get religion about actually having to pay to use copyrighted material - just like everybody else.

    Stern's contract will renew at a fair price relative to what he can deliver. If it's more than what he's worth SAT RAD won't renew - real simple.

    Just between you and me - no one else will be willing to pay him any more than Sat Rad.

    Oh, and ask him how he'd feel about going back to being regulated. That pretty much ensures Sat Rad is his first choice.

    Tim, did I mention it was a monopoly. That benefits Sirius not only in terms of customers, but also in terms of signing talent.

    You are on the wrong side my friend with a very limited and weak argument.

    End of story.

  • Report this Comment On April 03, 2009, at 6:39 PM, joeboo1 wrote:

    Too funny, you claim that Stern brought 9 million subscribers to Sirius. That part might be true. Do you really believe that 9 million people would move from Sirius to internet radio? You think that they would pay 1 dollar a month to be able to record a show on an Ipod and then plug it in to there car? It would not be a live spontaneous thing and sounds like a monotonous chore to download daily and then hookup for a drive into work. Besides even if 9 million signed up for 1 dollar per month (ridiculous!) that would be 108 million per year. You think Howard would take all the startup risk or do you really think a viable business model for a company would be to pay 103 million to Howard and run your business with the extra 6 million? Would Howard even leave for that extra 3 million? The guy wont even sell coffee mugs or T-shirts and has an ego larger than your ignorance. You think he would trash his product on internet radio? Maybe Eric the midget can hook him up with his internet radio company.

    Shamone!!!! Wakey wakey!

  • Report this Comment On April 03, 2009, at 6:45 PM, norenore wrote:

    I thought I'd share these rough numbers, not verified.

    Pre-merger, Sirius and XM each had 9 million subscribers (18 million total). 3.2 million Sirius customers listened to Howard Stern. Post merger, Howard had 3.9 million listeners.

    Of the 9 million subscribers that "came over" from XM, 700,000 immediately ponied up the $4/mo.? to add Howard on as a paid premium channel.

    My analysis is that if Howard leaves Sirius, it won't significantly reduce subscribers. Sirius listeners love Sirius, not just Howard. XM listeners love Sirius, too. They just don't love Howard quite as much as Sirius customers do, based on the percentages, 35.5% Sirius, 7.7% XM, respectively listen to Howard.

    Howard's total listeners are 22% of Sirius XM. (3.9 million of 18 million)

    Howard is a very savvy business person. Howard won't ever leave Sirius, it's the only broad platform** available to him**. He may, however, change his revenue model a bit.

    My expectation on the renegotiation would be that Sirius would pay X-amount for his content. Howard might make up additional income by selling spots and sponsorships direct. Two income streams for Howard.

    ** Regarding "broad platform": Howard can't go on terrestrial because of the FCC. If he goes internet, he'll get "lost" like Dan Rather on HDNET or the brilliant comedians on myowndamnchannel.com or funnyordie.com that you've never heard of. If you're not on Cable or Network, you simply can't deliver the audience numbers.

    Sirius needs to sell their unsold ads through Google, who is an expert at streamlining the buying process for advertisers. Everybody wins if Google sells Sirius XM ads.

  • Report this Comment On April 03, 2009, at 7:20 PM, geoslv wrote:

    Internet radio? I discovered what the listenership was for many of them. Average stations on live365 might have a couple of listeners. 5-10 is doing fairly well there, and higher starts to make you a star. I can't consider internet radio to be much of a platform.

    (they publish stats showing total listener hours, which covers the last 30 days. You need to know this. They don't talk about simultaneous listeners)

    Trouble is that each listener requires that amount of bandwidth, and you multiply from there.

    Internet radio is getting screwed royally on this royalty issue. It is being singled out for insane rates, by dumb socialists in Washington.

    Internet radio needs a lot of defenders right now.

  • Report this Comment On April 03, 2009, at 7:41 PM, Fredlee009 wrote:

    If thats your bearish take, Ill go with the bullish one. Wow, you ever should have written that article. Shows you know nothing of what you talk about. Sounds more like a 2 year old complaining to his mother than an article about finance. You list the same tired and stale arguments against SATD that weve heard for years. Not only is internet radio not competition, its so irrelevant even mentioning it shows your ingnorance. Internet radio?!! LOL What a joke. Its a dead duck. Period. Never survive paying royalties. Period. Slacker? LOL No comment. Like comparing a nice stakehouse to a fast food restaurant that keeps getting shut down for violating health codes. Only competition for SATD is itself. Mel and the board vs. common sense and reality. Looks like common sense and reality are finally winning. And so will the company.

    No word of debt in your article. No word of the R/S. Your whole article was basically saying you think long term Sirius will go broke due to subs disappearing like flies. Im still waiting..... and waiting....and waiting... Been saying this for years... Waiting.. O look they just added more revenue and subs while I typed this... O thats right because they are in 62% of all cars now. Soon to be 80%. Best business model for media in the world. Yes, the world. Better than sat tv(no competition.). Wait, they just added more subs while I typed that they just added more subs. O look, another Pandora listener just got frustrated that they play around 5 groups over and over, and just got a Sirius sub. Nice!!!! Hey author, ill bet you a hundred dollars you have a siriusxm sub. In fact, I know you do. Cause soon we all will. Just like we all now pay for TV. You want good tv, you pay for it. YOu want good radio, sorry, your going to have to pay for it.

  • Report this Comment On April 03, 2009, at 7:45 PM, PokerRon wrote:

    Sirius rules! Sirius will survive with or without Stern, Oprah, Stewart - not that it will have to because they'll all gladly renew at reasonable rates. Getting Sirius is like getting a dishwasher - you wonder how you ever got along without it!

  • Report this Comment On April 03, 2009, at 8:29 PM, KHipp wrote:

    Everyone has the same challenge (equally)

    CONTENT!

    You either have it or you don't.

    As an investor - the only question I need to answer is:

    "who is the most likely to provide quality programming/content when Stern leaves Sirius?"

    Thats it folks. Everything else you're talking about is completely meaningless.

  • Report this Comment On April 03, 2009, at 8:39 PM, siriradio wrote:

    Are they trying to push down the REAL NEWS about Sirius today , that MLB will be broadcasting live every game on siri.

    The last 2 articles were written like 4 mins apart and are doing anything to push down Good information for traders.

    We dont want your opinions, save it for a chat room.

  • Report this Comment On April 03, 2009, at 8:39 PM, KHipp wrote:

    I should add that I believe out of all the options right now.....Sirius is best equipped to develop quality programming.

    AND Sirius is the only option for uncensored live broadcasting.

    AND truth be told - the internet broadcast(s) suck!

    Ever listen to the mindless babbling on the internet?

    Producing a quality show is VERY difficult, and requires a lot of money!

  • Report this Comment On April 03, 2009, at 8:42 PM, siriradio wrote:

    Well said KHipp

  • Report this Comment On April 04, 2009, at 9:13 AM, mediaconsultant wrote:

    As always, content is king. Not just Stern, Oprah, Martha, MLB, NASCAR, etc.... but the fact that there is over 100 channels of really programmed content provided by people thinking how to make it good makes SIRI the winner. An internet radio station is very limited. iPods are great, but also limited and you have to make buying decisions frequently which is psychological much more difficult than paying once a year for a huge amount of content. SIRI needs to promote more to the 35+ market, even in tough times shelling out $12.95/month is not that big a deal. It's certainly worth a lot more than 13 songs on iTunes.

    SIRI is one stop shopping for a tremendous amount of content.

  • Report this Comment On April 04, 2009, at 10:01 AM, kingfrogcash wrote:

    Ad revenue is in serious hurt. Subscription revenue is being stress tested. Artists and the NAB want royalties so free isn't so free anymore.

    And let me know when VZ and AT&T reduce their smart phone rate plans.

    There has always been competition (which is why the merger was approved).

    Does the factory still install CD players?

    The walkman failed to keep pace, and Hulu will never reach mass. Content can be switched (even though there is outcry when someone is dropped).

    Downloading gets old for old people. Kids don't drive.

    Kids plug in their ipods when the parents turn on the 70's channel. Can't we all get along?

    Are we there yet? Pretty close!

  • Report this Comment On April 04, 2009, at 11:54 AM, latebloomer100 wrote:

    That article was so wrong it is laughable. I'm not going to address each issue. I am not going to burn up too many calories to set the writer straight but I will address one idea.

    So there are connections in cars today to hook up iPods and other Mp3 devices and you think that is a danger to Sirius. Duh, I don't think so. I recently let my XM subscription expire. I'm waiting for the new radio that gets both services that I can install in the trunk and control from the Pioneer head unit that I have. It's only been a week or so and I am going crazy already. Sure I have lots of Mp3 on both CD and iPid but guess what. I've heard all that before (and there is the flaw in your logic). It lacks the newness of fresh new talent that I heard on XM. And, BTW, much of that Mp3 music I am carrying around I bought as a result of listening to XM. So, would you like to explain to me how the iPod hook up kills Sirius?

  • Report this Comment On April 04, 2009, at 12:12 PM, ThongLover wrote:

    Stern, to me, has been disappointing...he's so calm now...nothing crazy. He could do his show now on FM without any trouble with regulation or censorship. He's really pretty boring.

    I agree with everyone else that there is such a HUGE amount of content...the music is awesome, but the content is king...CNN, CNBC, COMEDY, ESPN...the list goes on...PLAYBOY...Come on! Howard's not even in my top ten...get him outta there...BTLS and O&E will easily take his place...

    Go Sirius...

  • Report this Comment On April 04, 2009, at 12:20 PM, cantbefoolish wrote:

    Tim, you are talking about "what ifs". Is that really a good reason to be bearish? Howard has said repeatedly that sat/rad is the future. Why would he want to leave and compete against it? You're forgetting that post merger Sirius has cut costs. That will not only help them turn a profit, but they'd be able to offer more to Howard if he wanted it. Howard could also take more of a limited role, sort of like what Oprah does, and then Sirius wouldn't have to pay him as much.

    I don't agree that Sirius/XM is a monopoly. Like king said, the reason why the merger was approved, is because they have competition. But, to me the REAL competition isn't internet radio. It's the i phone, and now Sirius will be tapping into their technology, for a cheap way to gain a lot more subscription revenue. I think the I phone revenue alone will be enough to cover Howard's salary.

    As for content, Sirius is by far the leader. I don't think anybody could argue that, unless they're short the stock. While typing this, I've been listening to mandatory Metallica on my Sirius. Game over.

  • Report this Comment On April 05, 2009, at 11:02 AM, trippyv wrote:

    Just a few items and I'll move on.

    Royalty costs will kill 90% if not more of internet radio listeners.

    Less than 2 million listeners tune into Stern daily.

    I would say loosing the MLB or NFL would do more damage, but I find that unlikely to happen.

    I choose Sirius for Radio Margaritaville

    FINS UP!!! Long Sirius

  • Report this Comment On April 05, 2009, at 9:18 PM, Slidemonster wrote:

    Can you obtain sporting events on an iPod for my new vehicle..... while driving down the road..... yeah, right.

    No Brainer... car companies will still install these radios and its a value add (with incentives) to sell vehicles with this service installed... also sounds state of the art when trying to sell a vehicle..

  • Report this Comment On April 06, 2009, at 9:50 AM, asm610 wrote:

    Tim,

    Disagree with your point of view for the most part. That said, congrats on writing something that is not just fluff like so many articles are nowadays, and at least you support your position....however wrong I may feel or others may feel it is.

  • Report this Comment On April 06, 2009, at 3:23 PM, cloudofjoy wrote:

    I have been on XM for many years. There is more than three things that I love about having Xm in my car, and I often bring it into the house. I feel that XM Sirius is here to stay for many reasons and many of the reasons have been posted here. Interent Radio is a joke. I did pay for Live365 for a bit, but it isn't XM. The live content is by far one edge that you won't get with any of the load and play services. I put my money where my mouth is to the tune of 100,000 shares of Siri. I'm just waiting for 2010 when they go into warp drive in generating nothing but money. Anbody that thinks that the money that was used to bail them out was a gamble, is somebody who doesn't know the full story on Sirius XM. Sat Radio isn't going to be a thing of the past, it is still a thing of the future for the millions of people who don't have it yet.Does anybody think they have enough bandwidth for HD sat radio? That is something I thought could happen when they doubled the air space from both services into one.

  • Report this Comment On April 06, 2009, at 4:59 PM, TMFEldrehad wrote:

    <i>My point is this: Stern has options. So do most of Sirius' content suppliers.</i>

    Whack!

    That's the sound of the nail being struck squarely on it's head. I've been a SIRI and XM bear in CAPS for quite a long time now - and for exactly this reason.

    Well written.

  • Report this Comment On April 07, 2009, at 5:00 PM, coachj14 wrote:

    Since I am neither a Howard Stern fan [nor a fan of talk radio] and not an MLB fan, I see the sat radio thing from a different perspective.

    As a regular music listener, i believe i represent the proper target audience that SR needs to have in order to maintain viable growth, not the narrow segment of the population that listens to Stern or Baseball.

    As a user, I have found SR to be quite annoying and overpriced. I still have to listen to commercials and they still don't play a wide range of music on one channel [opting for a list of 40 songs that replay over and over].

    I personally would rather spend the money on an IPOD and play music I like than spending $12/month on this service. And BTW, I only spend $4/month and still don't think it is worth it

  • Report this Comment On April 24, 2009, at 6:39 PM, tom2727 wrote:

    I kind of like the concept of satellite radio, and I actually helped build the satellites that these guys currently use. Several of my friends are subscribers and love the service.

    But as an investor, I have never wasted one red cent on either XM or SIRI. The "bearish" case was always VALUATION in my mind. Both companies have always had tons of debt and negative operating income from day 1. Never was positive cash flow in sight. Both companies paid way too much for "exclusive" content by bidding against each other so they could be "the one that has Stern" or whatever.

    Now that they are one company, the situation is little changed. SIRI missed bankruptcy and zeroing the common by the skin of it's teeth. It DID wind up doing yet another super dilution, and it ain't out of the woods yet.

    The only hope I see for this company is if they can get the freaking costs under control. The best thing that could happen to them is for Stern to jump ship. He adds nowhere near the value they are paying for him.

    I'm still hoping they go into bankruptcy. A post bankruptcy SIRI would probably be a great investment. Right now, the stock is so diluted that even a best case 5 year scenario only gets it to $2-3/share in my mind. Worst case is of course zero.

  • Report this Comment On April 28, 2009, at 2:37 PM, DiscoFinance wrote:

    Great point! This issue is exposed in a new movie (stockshockmovie.com). FYI: I used coupon code: FREESHIP for free shipping of the DVD.

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