Sirius XM Radio in 2012

I'm jamming to Sirius right now, only I'm three years in the future.

I'm making the most of the January lull to hop into my time machine and check out how many of the popular 2009 companies are faring in 2012. I've already taken a look under the hood of several different companies, and now it's time to wax futuristically on Sirius XM Radio (Nasdaq: SIRI  ) .

For those about to rock
As you can imagine, life is pretty sweet in 2012. The way we listen to radio has changed -- and I'll get to that shortly -- but you probably have two very important questions on your mind that need to be addressed first.

No, the company didn't have to file for Chapter 11. It caught a few breaks between the refinancing milestones, but catalysts for a buoyant share price, coupled with a reverse split and a somewhat successful secondary offering by year's end, helped bridge the gap between desperation and self-sufficient cash flow generation.

There was too much at stake if the satellite radio provider had to turn to the bankruptcy court to reorganize its structure, as any consumer-facing company will tell you. Customers who don't know the difference between Chapter 7 and Chapter 11 get nervous and unsubscribe. Talent retention becomes a challenge.

Striking new deals and embarking on new initiatives helped galvanize the investor community. Pulling off a secondary offering as it turned the cash flow corner proved to be a godsend, as even a lukewarm market began to buy into the story that has come to define Sirius XM in 2011 and 2012: the beauty of all of those tax-loss carryforwards eating away at the company's effective tax rate now that it's profitable.

New slang
From your early-2009 vantage point, an onslaught of competition appears inevitable:

  • More cars are including input jacks for Apple (Nasdaq: AAPL  ) iPod players.
  • Ford (NYSE: F  ) and General Motors (NYSE: GM  ) are putting high-capacity, voice-activated hard drives into more new models, allowing drivers to rip their entire CD collections to satiate the need for commercial-free music.
  • Chrysler began selling trunk-mounted Internet routers last year, opening the door for devices to stream the infinite playlists of Internet radio in your car. This is already available, without the router, on 3G smartphones through free apps that stream Pandora, AOL Music, and CBS' (NYSE: CBS  ) Last.fm.

As all of these new ways to listen to tunes open the options for in-dash audio entertainment, justifying $13 a month for satellite radio isn't always an easy sell. Delivering content via costly satellites and a fleet of signal repeaters is also a harder overhead justification in 2012, when free Wi-Fi coats most of the country.

So how is Sirius XM thriving in 2012? Well, for starters, not everyone is paying for satellite radio. Even in 2008, Sirius XM was facing the challenge of conversion. Despite striking deals for cars to preinstall the costly receivers, nearly half of the new car buyers were not renewing their service when the free trials ran out.

CEO Mel Karmazin discussed the possibility of activating limited content on dormant accounts in 2008, but it didn't become a reality until 2010, to fend off competitive broadcasts. Free users get a few ad-supported channels and a free premium music channel that changes daily.

Another free channel is the Amazon Channel. No, it's not about the plight of rainforest or a haven for world music -- it's powered by Amazon.com (Nasdaq: AMZN  ) . Similar to television shopping channels like QVC, Amazon hosts a steady stream of deals that listeners can get in on with their interactive receivers.

Yes, the receivers are now truly interactive. Advertisers pay more, because you can click a button to receive more information directly from sponsors. The biggest music acts are on a waiting list for live appearances, because those spots allow the bands to move everything from concert tickets to T-shirts to digital downloads seamlessly through satellite radio. Did I mention that Amazon powers that, too?

A whole new world
The number of premium subscribers is only marginally higher than the 20.2 million Sirius XM had at the end of 2009. Yes, it did miss its original target of 21.5 million, which was revised down to 20.6 million in November of 2008. No one said success would come easily. Many of those subscribers are also on lower-priced plans with a limited number of channels, though some are paying more than $15 a month (the going rate in 2012, by the by), given an influx of premium content.

But all those small contributions add up. Sirius XM may have just 21 million paying customers by 2012, but it's a flick of a knob away from roughly 80 million more car owners through its free offerings and terrestrial syndication deals. Terrestrial radio is still around, but barely, as even local stations are throwing their efforts behind online migration.

Subscription revenue is still the key driver, but Sirius XM is making a steady flow of affiliate revenue (through Amazon, for instance) and online advertising. Its branded music channels have spawned Sirius-owned social networking sites for musical niche audiences. The stations put out digital release compilations on a monthly basis, with plenty of fans subscribing to the plans (in exchange for a price break on the monthly releases).

The allure of satellite radio changed, but Sirius XM turned the challenges into opportunities. It even tried to acquire Napster from Best Buy (NYSE: BBY  ) , though the FCC finally cracked down quickly to nix the deal.  

So don't cry for Sirius XM, despite its pocket-change price in January of 2009. The social networking initiatives will launch shortly, the soft subscription tallies will be largely ignored, and the bigger picture will gradually come into focus.

Some other tales of satellite radio fame:

Best Buy is a Motley Fool Inside Value pick. Best Buy, Amazon.com, and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz is such a fan of satellite radio that he subscribes to both Sirius and XM. He does not own shares in any of the stocks in this story. 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.


Read/Post Comments (11) | Recommend This Article (67)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2009, at 3:10 PM, ByrneShill wrote:

    I want some of what you're smoking. Or maybe not.

    Your analysis is so flawed. Neither this article nor the one you just posted about MSFT selling its comcast share make any sense. I think you have lost your way, my young padawan.

  • Report this Comment On January 21, 2009, at 3:13 PM, TripleWhiskey wrote:

    I have rather large collection of songs on my Comp.. I have other songs givin to me from people ages 16 to 40.. Avg 25... I have everybody make a list of songs they like when we have parties..They all have made numerous lists... It was great for about 10 parties then it got old.. The last resort and it worked was to shuffel the whole collection ..That actually worked.. ,But in the end I found sirrius to be a great tool at a party...Its not the same old list and it gives people time to party rather than trying to find a list that they havent heard 20 times.... Free DJ......

  • Report this Comment On January 21, 2009, at 3:53 PM, buzzltyr wrote:

    2012- 30 million subscribers (why with 500,000 new cars a month going out would subs not rise) , 20% price increase, 20 % reduction in the costly xm sirius war contracts, should be a $1 billion profit easy. BTW, the ipod and ipod jacks have been out for 4 years. We have seen what the competition brings with the ATT Cruisecast and is it laughable at best.

  • Report this Comment On January 21, 2009, at 4:13 PM, GeorgeSealy wrote:

    I see S/XM looking for more revenue streams and to position itself also as a content provider. They have a significant amount of talent under contract. So S/XM could work out some alternative delivery mechanisms. For example, as a DirectTV subscriber today I am able to get about 20 channels. There is no reason this could not be expanded into other S/XM offerings, such as Howard Stern. In this model I would pay an additional monthly charge per premium channel to DirectTV and they would then pay S/XM. The benefit to me is that I do not have to buy a S/XM receiver and all the stuff that goes with it.

  • Report this Comment On January 21, 2009, at 7:54 PM, metoyer wrote:

    The real question, from my perspective, is whether or not they have fixed their customer service issues by 2012. While I have always been a big supporter of XM. They recently lost me as customer due their horrible customer service. I understand they want to make it difficult to unsubscribe, but while trying to turn off one of my 4 radios I was hung up on twice, was lied to once (said it was turned off but later found out it wasn't) and routed to infinite hold music the last time. If you truly have a great product, you shouldn't have to go to these lengths to keep customers.

    In the end ATT, Sprint and Verizon will replace them as the source for mobile media. The reason? you have to have a cell phone anyway, why buy another device when todays cell phones can do much more than even a 2012 Sat radio will be able to.

    Sat Radio is doomed. At best they can only hope to survive as a media company providing their music services to the likes of the aforementioned wireless providers.

  • Report this Comment On February 10, 2009, at 9:53 PM, kirbyco wrote:

    I have had at least 4 radios on my xm account for the last 7 years-I dropped only one this year. I hate the DJ's on the decade channels that was why I went with xm to begin with -NO TALKING. If I want to hear Nia Blackwood or the other leftover MTV Vj's i would have gone with Sirius from the beginning. Customer serive has always been great for me as well as teh billing.

    I do not have an I-pod or download music, nor have I bought a CD in years.

    Just give me TALK FREE XM and I will never leave.

  • Report this Comment On March 13, 2009, at 11:26 AM, IdahoAve wrote:

    Apple, Google, Pandora, ect... something of this variety will be in cars therefore removing any need for XM Sirius Radio. I can't imagine they will have even a single subscriber in 5 years.

  • Report this Comment On March 17, 2009, at 6:56 PM, Drawdeyar wrote:

    I don't get this notion that cell phones are going to be able to replace the radio in my car anytime soon, whether it be free radio or satellite radio. I have an AT&T 3G cell phone, and in my travels I can barely receive static free phone calls. I can't imagine trying to stream anything, much less music, without pulling out what is left of my hair. Anyone who thinks that cell phones are going to provide any serious competition to either terrestrial or satellite radio within the next 5-10 years needs to get in their car, get out of the city and actually go for a ride - and then try to make a phone call.

  • Report this Comment On March 20, 2009, at 3:52 PM, SIRInternational wrote:

    1. It would seem that international sales will be the biggest growth-

    Western Europe- 300M (can they get 10% of this),

    Russia-Near East Asia 800M (5%?)

    Africa, South/Far East Asia (1.5B- even if they get just 1%???)

    2. I (along with 1B+ others who work 50-80 hrs per week) am not one to spend time downloading, mixing, loading songs or voice content. SIRIR- Here's $12/month- mix it for me!

  • Report this Comment On March 27, 2009, at 5:47 PM, VoodooLoons wrote:

    > Delivering content via costly satellites and a fleet of signal repeaters is also a harder overhead justification in 2012, when free Wi-Fi coats most of the country.

    You guys keep regurgitating this fantasy, and I keep asking you to state how you think this free national wi-fi thing is going to happen. Who's paying for it? Who's maintaining it? Why would they do that when it's free? The equipment isn't free... no to mention that you'd need tens of millions of 'em, and then there's the notion of public frequencies vs. private (which are expensive).

    And who's developing the wi-fi with the seamless handoff and authentication? Please, let me know so I can invest in them.

    Think it through, people.

  • Report this Comment On May 20, 2009, at 10:25 AM, Jimthedriver wrote:

    Anyone who has followed this company and uses the service gets it. I drive a lot as most people do if they have a job. Bottom line. everyone I know has sirius xm.

    Its not going anywhere, with rights to china and beyond this company is going no where but up. And I dont own the stock, but will soon.

    I do have friends that think ipods are the way to go, but its all the same stuff even if you have ten thousand songs, they are still the sam 10k songs.

    But when you ad LIVE news, sports, comedy, radio classics, political talk, weather, traffic, etc.

    Sirius rocks!!!!!!1

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