Some Sirius Questions[Fool on the Hill] March 29, 2000

An Investment Opinion

Some Sirius Questions

By Bill Mann (TMF Otter)
March 29, 2000

Many moons ago I was a disk jockey at my school radio station. I fancied myself a music snob and as such played ponderous complaint-rock and imitation Philip Glass compositions on the 2:00-5:00 a.m. shift. To say my show was bad would be an insult to bad shows. My DJing skills were logarithmically bad.

What I remember most about that experience was the sanctity of the clock cycle, the convention in radio that ads must happen at certain times, and must not be on at other times. The rationale of this convention were never clear to me, all I knew was that at 3:54 a.m. I had to go to a break. To this day, when I'm driving, I dread the approach of 50 minutes past the hour, because I know, within the next 5 minutes, every radio station I listen to will be running ads. Even National Public Radio seems to choose that certain time each hour to be relatively content free.

There is a company out there that is scheduled to have the solution to our station surfing blues by the end of this year: Sirius Satellite Radio (Nasdaq: SIRI). They are moving towards a late-2000 launch and gathering strategic partners: Ford (NYSE: F), DaimlerChrysler (NYSE: DCX) and BMW, which have put strategic investments into the company and are planning on offering a Sirius head unit and antenna in future cars.

Sirius will be the first coast-to-coast digital satellite radio service in the U.S. For a monthly fee, Sirius subscribers will be able to tune in to 50 different musical offerings and 50 other channels featuring such services as CNN, CNBC, weather, news, sports, and so on. And where ground-based radio stations have severe limitations in regard to reach of their signal, with Sirius one can receive the same station all the way from Portland, Maine to Portland, Oregon. To combat the line of sight problems that plague satellite communications, Sirius intends to set up repeaters and use buffering, smoothing out the dead spots caused by tall buildings, mountains, heavy forest cover, and other obstacles.

It's an intriguing concept, and really pie-in-the-sky. But a pie-in-the-sky project that provides a service that people or companies need is the ultimate in what we at the Fool look for in Rule Breakers. Qwest (NYSE: Q), Celera (NYSE: CRA), and Global Crossing (Nasdaq: GBLX) are prime examples. But these type projects, with enormous up-front costs and unknown market size do require particular study of the risk factors by investors. Just ask Iridium shareholders. Potential? Iridium had it going backwards and forwards. Big-time backing? Technology pedigrees don't come too much longer than Motorola's (NYSE: MOT). And yet, no one showed up to the party, and Iridium has failed.

But there is a deeper dark-side to Sirius and the origin of some of its capital. The largest single shareholder of Sirius, the origin of about $2 million of its seed capital, is Robert Friedland, who has a long and checkered history of running penny stock mining companies on the Vancouver Stock Exchange (recently merged and renamed the Canadian Venture Exchange), which is to equity markets what Jerry Springer is to talk shows. By some estimates, the chance of a private investor making money in the companies on the VSE is around 1 in 10. Mr. Friedland ran several companies up and down on the VSE, and always came out unscathed. By his own admission, he was attracted to the unregulated nature of the VSE.

His mining companies have caused almost incalculable environmental damage. For example, Galactic Resources, which raised some $200 million in private investment, had a site shut down by the EPA in 1991 after cyanide and heavy metal leaks from the mine had killed all marine life in a 17-mile stretch of the Alamosa River. According to Victor Malarek of the Candian Broadcast Corporation, the project lost some $85 million, but Friedland had left the company and sold his stake just prior to the shutdown.

The U.S. attempted to freeze over $100 million in stock assets held by Friedland in response to this disaster, but this was overturned on appeal. Mr Friedland had left the country and had moved his place of residence to Australia.

In my research on Sirius, I found article after article on Friedland and his mining activities, most of them containing tales of environmental disaster, industrial mismanagement of resources, and most importantly, Friedland somehow sliding out of harm's way in advance of the cavalry. It's a pattern that is too consistent and too deep to ignore. Whether it has anything to do with the operations of Sirius is another question.

But allow me to paint a picture. The lead investor of Sirius has a past history of using other people's money, raised on the equity markets, as his risk capital. This may not be out of the ordinary; obviously every public company is depending upon the willingness of investors to assume risk by holding shares. But the sheer Machiavellian brutality with which Friedland has conducted his corporate affairs in the past would give me grave pause as to his motivations with Sirius. And, since he, through his wife, is the largest shareholder, his wills and desires can in fact wag the dog.

As for the operational potential for Sirius, well, they have rested upon the fact that 28% of those they surveyed said they would be willing to pay for ad-free digital quality radio. I also read that Sirius and the automakers are planning several e-commerce ventures and remote diagnostic capabilities for the cars carrying Sirius using the "back channel" of the satellite relay. This, of course, will require that the Sirius systems be capable of transmitting as well as receiving signals, either using the satellite itself or another channel, such as a cellular network. In fact, this month Sirius announced an agreement with telematics service provider ATX Technologies to provide integrated cellular service with the Sirius system.

Both of these solutions are problematic. If Sirius adds in transmit capabilities via its satellite system, then all of the cars with existing Sirius service would have to be retrofitted with transponders, at some additional expense. But the cellular solution is imperfect as well, as Sirius would have to depend upon (and presumably pay) outside providers for its back channel. Additionally, the back channel portion of Sirius' offerings would then be limited to the same area covered by cellular, which does not nearly have universal coverage even in the continental U.S. Whether cellular costs are eaten by Sirius or passed through to the customer on a differential basis, these limitations would alter Sirius' business model.

Through all of this, I've got to admit that I've had just enough long stretches of car trips where the quality of radio programming dropped to nearly unlistenable proportions, worse than even my own ill-conceived notions of yore. ("Now, for the next hour, by request, we're going to play the complete catalog of Foghat!") For these times, Sirius' service would have been welcome.

But whether enough customers will show up to help this company meet its significant debt load ($550 million as of the third quarter of 1999) is a much deeper question. One that, for all of the company's projections and surveys, no one will know the answer to until people actually break out the check books and buy Sirius equipment and service, or not. Fortunately, the shareholders of Sirius have the proverbial canary in the coal mine in Friedland. If he starts to sell heavily, get out quick, because if past performance is any indication of future results, he has always sold at the perfect time.

Fool on!

Bill Mann, TMFOtter on the Fool message boards

You can read Robert Friedland's first response to this article here and his second response here.

Related Links:
  • Robert Friedland Responds to the Fool, 4/14/00
  • Robert Friedland's Second Response, 5/11/00
  • Sirius Home Page
  • Project Underground profile on Robert Friedland
  • Sirius Q3 10-Q, November 1999
  • The Hazardous Waste of the Vancouver Stock Exchange
  • The Ugly Canadian