Why is SatRad Still Losing Money?
Board: XM Satellite Radio

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By Somewhere
July 30, 2007

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I doubt most of you remember me. I used to post some very negative posts about satellite radio thinking most of you folks were ludicrously delusional about how well the stock would do. I even considered shorting the stock (never did, though--just don't have the guts to short a stock, I suppose), but I was certainly accused of being short the stock and trying to talk it down.

Then I lost my job during the dot com implosion (best thing to ever happen to me, I might add!) about the same time the Fool started charging for access to message boards and that was the last of me. I went off and traveled around Central America for a few months, thru-hiked the Appalachian Trail, and bought solid companies with strong balance sheets that seemed very unloved at the time and quickly forgot about them. (I've decided that not only do I really like the "buy and hold" strategy, but I like the "buy, hold, and forget" strategy even better.)

But I kept reading all about those satellite radio stocks. I never bought into the satellite radio mania, but it fascinated me and oh, how I wished I could still read these message boards. =) For the record, I still have no satellite radios nor do I intend to get any. I'm still happy with my traditional terrestrial radio stations. Heck, I don't even want an iPod. Sometimes I feel like I'm the last holdout against the iPod.

But I just loved the story here. It fascinates me. Radios. And satellites! That's just so darned cool.

So many changes have happened since I was last on the boards, and I'd like to throw out my two cents. I have no financial stake in satellite radio, long or short, XM or Sirius. Just a fascinated watcher....

Back then, I worried that not enough people would buy into satellite radio, or growth would be far too slow for such debt-ridden companies, but they did about as well as I hoped, which is actually better than I expected. How many people subscribe to satellite radio now? Last time I read numbers, I think it was something like eight million people subscribed to XM? Which is GREAT!

On the other hand, I keep shaking my head and thinking, "Why are they still losing money?!" Back in the old days, it was said they'd be cash flow positive with 4 million subscribers. How can they have twice that number now and STILL keep losing money? I haven't been watching that carefully, I admit, but what happened to all that money? I thought everything after 4 million subscribers was supposed to be pure profit?

Digital terrestrial stations I thought might pose a threat digital satellite radio, but I probably over-estimated that threat. I know some terrestrial radio stations play digital music, but I don't have one that can pick it up and don't even know anyone who does.

On the other hand, I never would have imagined the iPod's rise to dominance. The killer app I never saw coming. Maybe it's not as big of a threat as I imagine, but that's the one I think satellite radio should fear the most.

As for the merger between XM and Sirius.... I'm not sure what to think of that. I think it would be GREAT for both companies involved, but I'm rather fond of capitalism and like the idea of the two duking it out to the bitter end, if necessary. What kind of business model is it if it can't support just two competitors? If they can't make their business model work with 8 million subscribers each (after promising it could work just fine with a mere 4 million subscribers), maybe the companies should wind down and just go out of business? It's not personal, but it seems like a terrible waste of capital so far.

If the two do merge, I feel they should get more variety in there. Replace essentially duplicate channels with something completely different, and stop playing the same 40 songs on every station. Well, they can do that with SOME stations that are meant for pop music, but for most channels, they should not play the same song more than once a day. Seems like they have plenty of options to make that happen.

The whole merging of the two companies, though.... It would certainly be of benefit to both companies, but I can't help thinking it would just prolong the agony. As the iPod and Internet radio penetrate more deeply into society, satellite radio is losing its advantage.

Well, I'm thinking out loud here, I'm bothered by the reports I hear that satellite radio sounds surprisingly like terrestrial radio. The same top 40 songs playing over and over again, and even one of those shows being censored for insulting some group of people. Odis or something? I don't remember (and details don't really matter), but come on! If satellite radio wants to survive, they need to be DIFFERENT from terrestrial radio, or do what it does better.

I wonder how well they'd do if they made all channels available for free and survived purely with ads? Granted, it would be more like terrestrial radio that way, but terrestrial radio has done VERY well with that model over the years so there might be something to it. The breadth of choices that satellite radio could offer, though, would be nothing terrestrial stations could compete with. People would still need to buy the radio, but how many more millions of people would tune in if they didn't have to pay a monthly fee? Or perhaps even give out ten channels for free to get people hooked and make the rest of them premium channels that must be purchased?

Whatever they're doing now, though, clearly does not seem to be working now, and if the merger is just going to create a larger company that keeps doing the same thing the two have been doing individually, I'm not very optimistic about it's future. The stock is trading at about the same level it was five or so years ago when I was last on this board (although it had gone considerably higher during that time--I hope you all sold out then!)

But I still think this stock is way too risky for most people. A merger might prolong things, but something big needs to change if satellite radio wants to stay competitive. Their current business model just does not appear to be working.

I am glad to hear about the CEO stepping down, though. Maybe some fresh blood won't be afraid to make the big changes that is necessary. *nodding*

Anyhow.... to make a long story short, I haven't been on these boards in years, but I've thought about you guys during my time away, and even missed the sparring by bulls who could see no wrong in satellite radio. =) I probably won't post as much as I used to--I'm no longer stuck at a desk job bored out of my mind for eight hours each day with nothing better to do--but I'm back! ;o)

-- Ryan

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