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Sirius Satellite Radio
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By entoto
January 22, 2004

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As I a guy who has owned Sirius for years (formerly CD Radio, Inc.) and XMSR for about 18 months, here's my take...

Although Sirius has more cash than XMSR at the moment, their burn rate is much higher and, due to XMSR's faster subscriber growth rate, XMSR is actually closer to breaking even than SIRI.

Indeed, even with SIRI's cash (they went back for more in November 2003), I believe this stock will come close to bankruptcy. It all depends on how fast they can acquire subscribers and at what cost per subscriber (see various message board postings, research reports and even Fool articles for opinions on what sub growth will be and when/if they'll break even.)

Anyway, at the end of the day, go long if you believe the company will escape bankruptcy. If they do, the sky's the limit. Why? Mainly because the FCC granted XMSR and SIRI a duopoly. There's a COMPLETE barrier to entry. It's XMSR vs. SIRI, that's it, and my best guess is that SIRI will get at least 1/3 of the total market in the long run, especially when you consider what the recent NFL deal may mean to subscribers trying to decide between the two services. So they have half of a duopoly for, let's face it, a killer service (as proven by the rapid adoption rate and gleeful user feedback).

Short means you think the company won't make it (or that it will perhaps wind up in the purgatory of penny-stockdom, with all the attendant sales/trading issues). A strong case can be made that SIRI will wind up in Chapter 11. The company has demonstrated a buffoonish inability to execute. Their marketing, I believe, is still inferior to XMSR. XMSR has better deals with auto manufacturers. Siri satellite system presents more technical challenges than XMSR's.

(By the way, while we're talking about the actual satellites, here's a risk for ya': if Sirius loses one satellite, it will lose service for three hours a day until a spare can be launched and activated (at great cost, of course -- they may or may not continue to pay for insurance that could pay for launch of a spare). If it loses two of it's three satellites, service will be completely unavailable for 16 months. Adios, Sirius. The same scenarios are not as catastrophic for XM. If they lose one satellite, reception will be adversely affected but the service won't go out. If they lose two, even worse reception, but still live service. Of course, the risk of such a calamity is very low, not quantifiable by a neophyte such as me, but it's minimal. But problems with satellites do happen, just look at the power problems XM has had with its satellites, glitches that, while not blanking the satellites, has shortened their life-span. These problems have forced XM to launch their only spare (it's filing a large insurance claim to cover the cost). )

Back to the bottom line -- put me in the camp that believes SIRI will teeter dangerously close to bankruptcy but will eventually make it. My assumptions/projections are that subscriber growth will ramp quickly enough, and cost per sub will decrease sufficiently over time, to get them to break even before they run out of money. SIRI management has pulled out all the stops to make a run at breakeven, raising money through equity issuance to the tune of 93% dilution. This rocket is either going to the moon or crashing on the launch pad and they know it. If SIRI does pull through, then we're looking at DISH circa 1996 -- wha-hooo! (In fact, the DISH vs. DirecTV is a good analogy to study for SIRI vs. XMSR, except that there ain't no Charlie Ergen running SIRI).

For those more risk averse than I (read: less crazy/stupid), it may be a good idea to wait to get more clarity -- check out their earnings release and conf call on January 28. Look at the subscriber growth rate, cost per subscriber and cash balance, do some math and decide whether they will run out of dough before they break even. For those of you as crazy/stupid as me -- people who currently believe the company will make it and are willing to hold for 3-5 years -- now is the time to take the plunge.


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