History is littered with the remains of companies with business models similar to XM Satellite Radio (Nasdaq: XMSR) -- firms with high capital costs who thought their first-mover advantage, combined with the tremendous up-front charges needed to get into the business, would provide them an insurmountable moat against competition.
Consider the saga of former telecommunications giant AT&T (NYSE: T). The former behemoth had not only a government-enforced monopoly, but a 'natural' monopoly as well, thanks to its extensive nationwide network. Yet once competition entered the fight, in spite of its tremendous entrenched advantages, the once great firm withered to a shell of its former self.
Even if a company isn't destroyed by its expensive infrastructure costs when a more nimble competitor comes along, an enterprise can be distracted by its pet projects, taking its eyes off more immediate threats.
Remember Motorola (NYSE: MOT) and its expensive satellite telephone network Iridium? A complete loss, as a result of the fact that it is simply so much cheaper to erect cell phone towers than to launch and maintain a series of expensive satellites. With the possible exception of folks traveling in the most remote reaches of the world, there were simply cheaper and more convenient alternatives available elsewhere. As such, the market never materialized, leaving Motorola with expensive infrastructure and no customers to pay for it.
High infrastructure costs are only a legitimate barrier to entry if there is no way to get around them. In XM's case the barrier has more holes in it than Swiss cheese. Terrestrial giants like Clear Channel (NYSE: CCU) offer real-time radio for free, yet somehow manage to turn the type of profit that continually eludes XM. In the satellite business, XM seems to be locked in a perpetual game of one-upsmanship with smaller rival Sirius (Nasdaq: SIRI). The result: Neither company can make any money in spite of their skyrocketing subscriber numbers. And now, with Apple (Nasdaq: AAPL) and its iPod offering hours upon hours of uninterrupted music and podcasts for virtually nothing, even the "commercial free" benefit of paying for an XM subscription is under attack.
Show me the money
It'd be one thing if XM could figure out how to profit from its business, but the simple truth is that it hasn't. Take a look at a few key financials to see not only a sea of red ink, but also an extremely frightening share dilution trend for anyone who believes that shareholders are the owners of a business:
| Year |
Revenue |
Net Earnings |
Shares Outstanding |
| 2000 |
$0 |
($201,388,000) |
48,508,042 |
| 2001 |
$533,000 |
($307,532,000) |
59,920,196 |
| 2002 |
$20,181,000 |
($515,871,000) |
86,735,257 |
| 2003 |
$91,781,000 |
($604,880,000) |
125,176,320 |
| 2004 |
$244,443,000 |
($651,170,000) |
197,317,607 |
| 2005(*) |
$318,831,000 |
($404,838,000) |
215,484,949 |
(*) First three quarters
In spite of climbing revenues, the company is still losing more money than it's taking in from customers. Even the high-fixed-cost nature of the service doesn't seem to be helping -- revenues are higher now than total costs were in 2000 and 2001, yet the company is still hemorrhaging cash and destroying shareholders' wealth. To make the picture even worse for shareholders, buried in the company's most recent 10-K is this little gem:
"We have issued an outstanding securities exercisable for or convertible into a significant number of our shares of Class A common stock, including securities issued to General Motors.... On a pro forma basis as of December 31, 2004, if we included the shares issuable upon conversion or exercise of outstanding securities, we would have had 329.1 million shares of Class A common stock outstanding on that date."
In other words, if you think the past share dilution has been bad, you haven't seen anything yet. Just wait until General Motors (NYSE: GM) starts exercising its right to convert its current securities into shares. Then the dilution will really take away whatever little value may be left in XM's shares.
The Foolish bottom line
With red ink flowing as far as the eye can see, an outrageously high-fixed-cost structure, share counts skyrocketing, and competition nipping at every aspect of the company, I simply see no reason to speculate in XM's stock. The market offers far better deals elsewhere.
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At the time of publication, Fool contributor Chuck Saletta owned shares of General Motors. The Fool has a strict disclosure policy.
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