We're dueling over satellite radio here on Fool.com. Seth Jayson thinks XM will win this battle, while W.D. Crotty says not to sell Sirius short. Read both articles and then vote for which argument you think is better.
Let me start out by saying that I have nothing against Sirius Satellite Radio (NASDAQ:SIRI).
Sure, I wonder how the company can keep a straight face while calling Vincent Pastore's Wiseguy show a "celebration of Italian-American culture." And, yeah, I've got to give a thumbs-down to the cheesy Pamela Anderson video on the Sirius home page.
Heck, I'm going to ignore all that. I'll even go the extra mile and avoid making an estimate of the average Sirius shareholder's analytical capacity based on the startling hostility contained in every piece of logic-, spelling-, and grammar-challenged hate mail that comes my way when I dare criticize Sirius.
My problem with Sirius is only with the company's valuation. Before you start screaming, "But... but... XM is...." Shhh! Everyone should know that a $3 share is not necessarily any cheaper than a $23 share of XM Satellite Radio (NASDAQ:XMSR). In fact, the latter's $4.5 billion market cap is only a half-billion more than Sirius'. Given its uphill battle, Sirius has no business being that pricey.
First, let's face one simple fact: There's no really rational way of valuing either one of these companies. It's tough to do a discounted cash flow when the cash is only flowing out, they are both in hock up to their eyeballs, and no one knows when (or if) either will eventually turn a profit.
Shall we get a bit un-Foolish and look past the numbers?
Is it the content?
Yeah, yeah, yeah. I've heard all about Sirius' great content advantage. NHL hockey? What's that? Might as well broadcast Pakistani cricket. Football and basketball? Yawn. People already get free radio broadcasts of the games that matter -- i.e., their local teams'. Sure, there might be an appeal to the total sports nut -- the guy in Plainfield, Ill., who just has to listen to Cardinal football -- but how many of those guys are out there?
I will give Sirius five points for carrying NPR -- home of Fool Radio -- and PRI. That alone would make Sirius my personal choice. But I'm not sure these, the official stations of non-threatening, Volvo-driving liberals, do much to attract the more typical satellite radio listener.
As far as content goes, Sirius partisans used to have a better argument with the whole commercial-free music thing. Sure, they could say, "Ours costs a few bucks more, but you don't have to listen to all those annoying ads for Goldie's Geriatric Powder and Turbo Fiber." As of February, XM had wiped that advantage away, making its own music channels commercial-free.
It's the valuation, stupid
Maybe I ought to stop poking fun. After all, being a Sirius shareholder takes a lot of faith... and maybe some prayer. The recent market cap of around $4 billion values the company at 309 million times the monthly service fee. That's $10,000 per current user. That's 70 years' worth of subscription service per customer, assuming they all buy the yearly plan. That's a long time. If you ask me, Sirius needs to move past the car companies like Ford (NYSE:F) and cut a deal with Newell Rubbermaid's (NYSE:NWL) Graco to get receivers installed in baby strollers.
But enough throwing rocks at Sirius. My job here is to support the notion that XM is a better investment bet. Note that I didn't say a good investment. I'd be the first one to agree with the panicked-looking value hunters out there who are looking at these two and thinking, "Hmmm, that's like choosing between a club to the head and a knee to the you-know-where." Hey, I gotta pick one of them, so a bat to the noggin it is. (Sorry, W.D., I guess you take what's left.)
Maybe it's the subscribers
This business model depends on signing up new subscribers, and fast -- at least quickly enough that the red ink is moderated before the company vanishes into a less-than-fondly-remembered crimson puddle. XM is not only farther down the subscription road, it's gaining speed.
XM added more than 430,000 subscribers during last year's holiday quarter -- that's more than Sirius' entire pool today. It finished 2003 with 1.36 million. Moving right along, during the first quarter of this year, XM's listenership grew by another 320,000 or so, reaching 1.7 million.
By contrast, Sirius finished up 2003 with 261,000 listeners. It finished 2004's first quarter with 352,000. See the problem here? Once again, XM added nearly as many subscribers in the quarter as Sirius' total tally. That values XM at about $2,700 per set of ears. Sure, that's still nutty, but it's not nearly as crazy as Sirius' $10,000.
XM is outrunning Sirius in the race for subscribers and spending less to do it. XM's latest subscriber acquisition costs are $67 per listener; Sirius shells out nearly $250 per head. Even when you factor in marketing expenses, XM's cost per acquisition is $106. That means the company is spending a lot less ammo in this war of attrition.
Can't we just be friends?
The last reason I have to side with XM in this satellite radio throwdown is that the company just doesn't seem quite so desperate. What do I mean? Well, take Sirius' recent press release claiming an increase in "market share." Turns out, it's complete bunk because the metric to which management is referring isn't subscribers, but rather receiver sales, and the numbers on which it bases its claim don't include XM units moved at a little place called Wal-Mart (NYSE:WMT).
It smells a lot like Sirius is managing its share price, rather than just its business. That's a warning sign any Fool would do well to avoid. By contrast, XM looks a bit more hype-free.
Is XM worth $4.6 billion? I don't know that I'd agree with that, but given its lead subscriptions and accelerating pickup rate, it looks like the pony to bet on. Sirius? I don't think it's doomed to float belly-up in the Wall Street commode, but I've said it before and I'll say it again: It's overpriced, and it's cruisin' for a bruisin'.
Next -- Read Dueling Fools: Serious Sirius and then vote.
Fool contributor Seth Jayson reminds you that he spent several years of his life righting wrongs as a secret superhero. He owns no stake in any companies mentioned. View his Fool profile here. The Motley Fool is investors writing for investors.
