December 17, 2005
XMSR or Sirius
Jeff Matthews has a great piece which is a must read on the subject - thanks Jeff - great blog
Howard: The Best Thing That Ever Happened…to XM?
ON JANUARY 9 THE GLOVES ARE COMING OFF…AND MAYBE SOME TOPS.
That’s the headline for a full page ad running in the newspaper of record—The New York Post—above the image of a clenched fist that is the logo of the new Howard Stern radio show coming soon on satellite radio.
In the unlikely event you haven’t already heard, New York “shock-jock” Howard Stern will start his morning gross-out-o-rama January 9th on Sirius Satellite Radio—and he promises the uncensored setting will allow his inner-deviant to fully reveal itself via not one but two channels on the Sirius network.
Says Howard: “If it's weighing a guy's bowel movement, I can do it. If I want to be gross, I can be gross.”
Now that should be funny.
Financially speaking, Howard has already covered the cost of his five-year, $500 million contract with Sirius by virtue of the fact that at least a million of his 10-12 million Infinity Broadcasting listeners will have signed up with Sirius for its $13-a-month subscription service in order to listen to Howard weigh a guy’s bowel movement and whatever other hilarity he has in store.
$13 a month times twelve months in a year times one million new subscribers approximates $150 million of incremental annual revenue for Sirius. Even adjusting for subscriber churn (the rate at which subscribers drop the service), the deal was worth every penny to the Number Two satellite radio operator—which stumbled out of the gate thanks to being overly dependant on Ford Motor, badly lagging XM in market share.
And now that Sirius has Mel Karmazin as its CEO—Karmazin being the man Don Imus called “The Zen Master” when he was building Infinity Broadcasting into acquisition-bait for Viacom—satellite radio has truly come of age.
Judging by the recent moves in Sirius shares, a lot of people are betting on Howard to be the satellite-equivalent of Milton Berle—the comedian whose popularity drove millions of Americans to buy a television set.
But is Sirius worth the price?
Sirius has 1.3 billion shares outstanding, $1.1 billion debt and $900 million of cash, according to my Bloomberg. At $7.00 a share this yields and enterprise value of $9.3 billion.
That’s roughly $3,100 per subscriber based on Sirius’ stated forecast of hitting 3 million subscribers by the end of this month.
XM, meanwhile, has 222 million shares, $1.1 billion of debt and $750 million in cash, giving it an enterprise value of $7 billion at the recent $30 share price.
That’s $1,160 per subscriber based on the forecasted 6 million subscribers at year-end.
So, right now, Sirius—despite having a higher fixed cost base with the Howard Stern and NFL content deals, plus less desirable satellite coverage than XM (Sirius needs another satellite to ensure complete coverage in event of a failure)—trades at almost three-times the per-subscriber valuation of XM.
Is a Sirius subscriber worth three-times an XM subscriber?
Both Sirius and XM—the Avis and Hertz of the business—present essentially the same service, beaming 100-plus channels of content, mostly interruption-free, to most corners of the country.
And that service is, to use a cliche, a game-changer: you can hear almost anything you want to hear, plus a lot of music you haven’t heard before—but with no commercials, no idiotic disk-jockeys, no Clear Channel-type 20-song computer-selected playlists.
Once you’ve tried satellite radio, regular AM/FM radio sounds hopelessly ancient, and a twenty minute drive in a car without XM or Sirius becomes torture. Five years from now, I expect satellite radio will be standard on all cars and increasingly taking share at home.
In the meantime, however, the subscriber base of nine million is relatively low, though growing quickly. Both XM and Sirius lose money and lose a lot of it—thanks to the high up-front cost of putting up satellites and building the systems architectures and chip designs for the receiving units.
But the ongoing capital expenditure is remarkably small. There is no Cable Guy who needs to drive out to your house and string cable and drill holes to set up the service. So at some point down the road, the satellite radio business—unlike cable—should turn actual real no-pro-forma-type-nonsense cash profitable, and, later on, might actually generate earnings for shareholders.
So, is Sirius really worth three-times XM? Only if you believe that Howard will continue to accelerate Sirius’ subscriber growth rate and allow Sirius to, over time, become three-times as profitable as XM.
But that is doubtful, for three reasons.
First, XM dominates the factory-installed automobile market.
Second, Howard Stern is probably as big as Howard Stern is going to get—a point lost on many retail accounts now buying Sirius stock to “play Howard.”
Third, and this is more speculative, but the headline in the Sirius advertising campaign, plus Howard’s own interviews, indicate Howard is turning towards a much darker direction than maybe even Howard’s fans are going to be comfortable with.
He appears to rule out only bestiality and torture: “I'm not comfortable with somebody killing someone, I don't want people being hurt.”
Most parents, given a choice of two satellite radio systems with essentially the same music, news and entertainment offerings for their car, will probably opt for the one that does not offer the sounds of human beings copulating, crack-addicted prostitutes debating sex, drugs and world events, and whatever else the uncensored Howard plans to broadcast on two Sirius channels, 24 hours a day.
That is not morality speaking, just practicality.
My guess—and I have no stake in the outcome—is that Howard’s value to Sirius has already peaked. In fact, he may be the best thing that ever happened to XM.
I Am Not Making This Up