I don't think that Sirius is a perfect company. It has some serious debt and dilution concerns that worry the heck out of me come 2010. However, if my buddy Tim's pessimistic outlook is as bad as it gets, Sirius XM is going to have no problem coasting higher.
Live and learn, Stern
A major theme in Tim's thesis is that the magnetic Howard Stern may bolt from satellite radio when his contract with Sirius runs out at the end of next year. He can always retire, of course, but Tim suggests that the self-proclaimed "King of All Media" will decide to go it alone come 2011.
"What would happen if Stern left for Web radio?" he argues. "What if he set up his own private studio, struck a deal with a Web hosting company, and started broadcasting under his own brand, independent of Sirius XM or any other media conglomerate? Would you pay $1 a month to listen?"
By Tim's math, Stern can replace his $100 million deal with Sirius by finding nine million fans willing to pay $1 a month to stream his antics. It sounds reasonable, in theory, but Stern's audience peaked at 12 million when he was available for free on terrestrial radio. As anyone that has ever weighed a free model against a premium subscription platform will tell you, you don't just lose 25% of your audience when the tollbooths go up. The vast majority walk away. He would also need far more than that to cover the costs to ramp up, promote, and maintain a new venture.
Internet radio is also still a rare bird in cars, and that's where Stern's morning show is the most valuable to commuters. Sirius XM has actually shed retail (non-car) subscribers over the past year. New car buyers represent satellite radio's most willing audience. How will Stern reach them?
How well would Stern do with Web radio? Some 3G smartphones like Research In Motion's
In short, the market to stream Stern via Web radio is limited to those already paying $30-$80 a month for connectivity, and they still have plenty of hoops to jump through to make the experience auto-friendly. Stern has a better shot of getting 900,000 fans to pay $10 monthly than rounding up 9 million monthly buck-flingers, but 2011 will still be too soon.
If Stern wants to keep the show going, Sirius XM is the only platform in town when it comes to premium automotive connectivity from coast to coast. If he's a gambler, maybe he cuts a new deal where his show becomes an upcharge offering on both Sirius and XM, where he collects the lion's share of the premium. It would be a win-win for Stern and Sirius. It may also open up the door for the last of terrestrial radio's reigning stars to jump off that sinking ship.
Either way, if Stern isn't going to retire -- as he has threatened -- Sirius XM is his best shot to reach listeners, given the sorry decline of terrestrial radio and the unproven realm of premium-priced Internet radio.
Other bearish knocks
Let's go over a few of Tim's other pessimistic charges.
While it's interesting that Stern will soon broadcast to your iPhone, Ford
Yes, more cars are adding iPod jacks to their cars, but pre-loaded iPods have always been a bigger threat to a car's CD player than to terrestrial radio. Drivers feast on fresh content. More importantly for automakers, there are no royalties paid by the makers of media players to the car companies for an audio jack. They are, on the other hand, financially motivated to push Sirius XM subscriptions where they get a piece of the action.
Substitutes are everywhere.
There are plenty of media players out there, but most -- like the iPod, Microsoft
MLB last week released an application for the iPhone that, for $10 for the season, will deliver live Web radio game feeds for all 30 teams.
This is actually bullish for Sirius XM, since it means that either content costs are falling or that content providers like pro baseball believe that the battery-sapping practice of smartphone-streaming is a niche product at best. Either way, it will be great ammo for when Sirius XM has to renegotiate that particular deal.
So don't fear the reaping, Tim. Threats to Sirius XM are either distant or opportunities in disguise.
You've just read my rebuttal. Read the rest of the duel here:
Longtime Fool contributor Rick Munarriz is such a fan of satellite radio that he subscribes to both Sirius and XM. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.