Sirius XM Dead in 3 Years? Pshaw!

Here's why satellite radio isn't going to be bumped off.

Rick Munarriz
Rick Munarriz
Apr 26, 2010 at 12:00AM

Who tossed Sirius XM Radio (Nasdaq: SIRI) back into the death pool?

"I'm not sure there's going to be satellite radio in the next three years," Washington Post business reporter Frank Ahrens said during this weekend's Motley Fool Money Radio show.

Not again! Sirius XM is finally tasting success. Its stock has closed with a bid above $1 for eight consecutive trading days, leaving it just two days away from regaining its listing compliance with NASDAQ OMX Group (Nasdaq: NDAQ).

The upbeat trading is warranted, as Sirius XM has been able to achieve positive cash flow, push back its debt repayment obligations, and has now come through with three consecutive quarters of net subscriber additions.

However, Ahrens isn't an ignorant basher. He is one of the platform's earliest adopters, stepping up as an XM subscriber more than eight years ago. He praises the product, though he's not sure of its lasting power.

Transitional radio
The crux of Ahrens' argument is that he sees satellite radio as a "transitional technology"  -- basically "a bridge between where we were and your PC in the car."

In other words, just as it's hard to go back to terrestrial radio after sampling satellite radio, it will be hard to justify a premium, subscriber-based service when cars are tethered to everything that can be streamed off the Internet.

The mobile connectivity migration is happening. Automakers themselves have been slow in offering in-car wireless routers, but it's breaking through in the form of portable gadgetry. 3G and 4G smartphones can do it. The popularity of Novatel Wireless' (Nasdaq: NVTL) MiFi and Sierra Wireless' (Nasdaq: SWIR) Overdrive mobile hot spots open the door for automakers and audio component manufacturers to introduce more Web-based radio.

There are a few shortcomings to the thesis that Sirius XM is on a limited lifeline, though.

For starters, it's hard to argue against an incentivized partner. Apple (Nasdaq: AAPL) isn't paying royalties to automakers for installing audio jacks in cars. Pandora isn't going to share its meager revenue with car manufacturers if connectivity improves on the road. Satellite radio is different. It's been striking deals with car showrooms for years, making sure that the installation rates are high and actively promoted.

Another satellite radio lifeboat comes in the form of accessibility. Radio is supposed to be a passive, yet rewarding, entertainment process. Tracking down Internet streams, podcasts, and stored MP3s can turn into a cumbersomely sophisticated process. It may also prove to be overly distractive to someone manning the wheel.

The future of radio
I'm not naive. I think it's totally feasible that the socialization of the Web transforms the way we entertain ourselves on the road. In a few years, why can't a morning commute consist of customized hyperlocal news nuggets, audio messages from Facebook friends, text-to-speech conversions of Twitter followings, favorite podcasts, and play lists pooled together by like-minded buddies?

All of this can happen, but it doesn't mean that it will happen.

Along the way, Sirius XM will evolve. After all, if rival ear magnets improve their game over time, why not Sirius XM? The next generation of satellite receivers will make it easier to engage in e-commerce, provide more interactivity, and be more customizable.

The important thing to remember in the eventual flux is that Sirius XM has a huge lead right now with more than 18.9 million subscribers. Never underestimate the advantage of having a sizable paying audience.

Netflix (Nasdaq: NFLX) clearly won't be the only company providing unlimited movie streams in the future, but it has a base of 14 million members (and growing), which won't make it easy to overtake. Research In Motion (Nasdaq: RIMM) is still moving millions of BlackBerry handsets every passing quarter. Competition may intensify, but it's still blessed with a lead that isn't easily surmountable.

Content is kingfish
Ahrens' bearish perspective on the future of Sirius XM came up as he proposed that if Howard Stern is still on the air in three years, Sirius XM's model at that point wouldn't be able to pay for him.

It's an interesting point, but where would the more lucrative alternatives be for Stern and other high-priced talent? Terrestrial will only fade with broader choices, and free, ad-supported online content will never be caught writing big checks. Sirius XM should continue to be radio's great monetizer.

That's why I wouldn't be betting against Sirius XM right now -- or three years from now.

Where do you see Sirius XM in three years? Share your thoughts in the comments box below.