With a decision on the merger between XM Satellite Radio
XM is often portrayed as the slacker, making it that much more refreshing to see XM chairman Gary Parsons paint a healthier picture of satellite radio in general -- and XM in particular -- during his presentation at the Merrill Lynch Media Fall Preview yesterday afternoon.
If you're not a fan of XM, let's see where you stand a few paragraphs from now.
Channeling the channels
You've been hearing a lot from Parsons lately. He's been the public face at XM since the merger was first announced, slated to serve as chairman of the combined company, and playing a bigger part in XM's direction now that Hugh Panero is on the way out as CEO.
So you've been hearing Parsons, but are you actually listening?
XM remains the larger of the two satellite radio providers. The company expects to close out the year with more than 9 million subscribers. If you were to count factory-installed receivers sitting dormant on dealer lots -- like Sirius does -- that number would be closer to 10 million.
Sirius has momentum on its side, but XM is still the top dog. (Compare and contrast XM with Sirius.)
Yes, XM suffers weakness at the retail level. Consumers aren't rushing to their nearest consumer electronics superstores to snap up portable models, nor going for third-party installations. Any growth for XM and Sirius has come from deeper penetration into the new-car market, and both companies are just scratching the surface there.
XM and Sirius serve more than 15 million subscribers, but every year finds 16 million to 17 million cars rolling off the assembly line. XM has deals for factory-installed XM receivers with automakers covering 60% of the auto market, and every passing year finds those manufacturers widening the number of models that come with satellite radio before they hit the showroom.
So XM's reach is growing, and not just thanks to the 1.8 million General Motors
They say that you can bring a horse to water, but you can't make it drink. It also follows that you can install satellite receivers in car buyers' dashboards, but you can't make them subscribe. XM provides a three-month free trial to all new-car buyers -- a deal it's now extending to secondhand sales of XM-equipped used cars -- and just 52.7% of those buyers continue to pay after the time is up.
If the deal dies...
Momentum has been gradually shifting in favor of the deal's approval, but investors need to know what they'll be holding if regulatory forces call the whole thing off.
XM investors may be surprised at what they'll be left with. XM isn't just the company with the larger subscriber base and smaller market cap. It's also the provider with the lowest subscriber acquisition costs.
This doesn't mean that XM is skimping on marketing or programming. In fact, Parsons stands by the nine-figure multiyear deals (baseball for XM, Stern for Sirius) that have made satellite radio an indispensable entertainment appliance.
"You have to have truly differentiable, unique, exclusive content, or else you're putting your entire strategic future in the hands of the technology," he said yesterday afternoon "And anyone who thinks that technology -- a single technology -- will always have the commanding presence, really doesn't know much about technology."
If this sounds like someone trying to champion a merger by pointing to the threat of cell phones, WiMAX-blessed Internet radio, and terrestrial radio, you're hearing it right. You're just not listening.
The marketplace is forever evolving. But XM and Sirius's millions of paying subscribers allow them to stand out in producing superior content.
Parsons recognizes that untapped potential. Ad revenue is currently just 4% to 5% of the mix; he sees that figure growing to as much as 10%. The company offers one-way streaming services like stock quotes and baseball scores to most subscribers for free, but there's room for growth in its weather and traffic-navigation premium offerings.
If the deal lives...
Substantial synergies will be realized. Sirius chieftain Mel Karmazin has pegged the dollar amount as "billions -- with a b." One of the bigger changes, though, will come in the diversity of pricing plans and programming options for consumers.
Both companies have filed to offer plans for as little as $6.99 within a year of the deal's completion, almost half the current $12.95 plan. Music junkies can have a discounted block of mostly commercial-free music. Sports buffs can tune in to the 5,000 sporting events broadcast on XM every year, and then plug in their iPods to cover their music needs or Audible
XM hopes that this flexibility will help win over the 47% of new-car buyers who kiss off the service after their free trials expire. Sure, it's also likely to cannibalize the $12.95 subs, but that explains why XM and Sirius plan to offer premium packages with the best of both services.
The future will be about choice and pricing flexibility, but it ultimately means greater subscriber growth. If you're too concerned with the red ink on the bottom line to notice the chunky subscriber margins before marketing costs, you're at it again.
You're hearing. You're just not listening.
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Longtime Fool contributor Rick Munarriz is a fan of satellite radio and subscribes to both services. He does not own shares in any of the companies in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy is high-fidelity and 100% commercial-free.