I'm going to whip out my crystal ball and tell you what I see. It's a little dusty -- I got it at an Elaine Garzarelli garage sale -- but give it a chance.
Sirius Satellite Radio
Alas, the scapegoat's wearing an engagement ring. XM and Sirius can point to the late-February merger announcement in an attempt to explain away their quarterly shortcomings. They can tell us:
- Consumers are confused.
- The public doesn't understand that a merger won't make today's receivers obsolete, yet people have held out from buying anyway.
- There is no perceived rush to subscribe until content-sharing deals are announced.
Analysts will buy the excuses, at first. Then one sharp analyst will ask the question that will sink both ships. Mel? Hugh -- I mean, Gary? How were subscriber additions trending during the first seven weeks of the quarter, before the merger was announced?
That's when things will get tense. Palms will grow sweat-slicked. They'll give the "operator, cut the lines" distress signal. It won't work, and then they'll fess up that the weakness that began toward the end of the fourth quarter has only gotten worse after the holidays.
They may still be able to spin the initial weakness as a positive, like a sharp job applicant overcoming a troublesome resume:
- This is why we have to get married!
- A regulatory-backed union will save us all!
- Baba Booey, Baba Booey, Baba Booey!
But what happens if the deal doesn't go through? What if these two companies are more broken than we think?
Obfuscation by addition
I was being interviewed by Sam Litzinger for Washington Post Radio yesterday -- talking about Don Imus and satellite radio -- when Sam mentioned that everyone that he knows at XM is assuming that the merger will be approved.
I understand the need to forge ahead, at least publicly, as if the combination will be approved. But there has to be a Plan B. How can there not? If this whole thing winds up being a parade to nowhere -- and that's a real possibility, given the tough time the companies have had at congressional hearings -- what happens next? Will this have all been a costly distraction? Will both companies be even weaker in the aftermath?
Don't worry -- I can buff this crystal ball a little harder and catch a glimpse of how things may play out a few months from now.
Go ahead -- rent a tux anyway
I'm seeing that there will be a merger. It just probably won't be between XM and Sirius. A larger player, such as News Corp.
Back in the here and now, the market seems to either agree that a deal won't happen, or not care if it does. Investors, meanwhile, may be bordering on the delusional. I got an email earlier this week from someone bragging about his stake in Sirius.
"I happen to own 2,500 shares of Sirius radio stock, and my investment is doing very well," he wrote. Keep in mind that Sirius is trading at levels last seen in September 2004. I guess "doing very well" is relative. XM is trading for less than it was before Sirius proposed to buy it out at a premium.
Each company is looking to add fewer net subscribers this year than it did in 2006. I don't know whether the scapegoat donning the bridal gown will force either company to scale back its year-end subscriber targets later this month, but it may happen come July.
This isn't a broken sector. Satellite radio is a tough sell overseas, if the financial struggles at WorldSpace
If WorldSpace can storm back, cost-conscious versions of XM and Sirius may be able to as well. I don't think a salivating suitor will let things get that far, though. Someone has to profit from the calamity that I see in my crystal ball.
If XM and Sirius are too head-over-heels in love to work on alternative plans, you can count on a beefier media giant coming in, kicking out the scapegoat, and dictating the plans for an arranged marriage.
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Longtime Fool contributor Rick Munarriz is a Sirius and XM subscriber. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.
