To some, satellite radio is the wave of the future. To others, it’s just another voice in a crowded marketplace, and one that loses a lot of money to boot.
Indeed, both of the industry’s players–revenue and subscriber leader XM Satellite Radio and Sirius Satellite Radio, soon-to-be home of the playfully foul-mouthed Howard Stern–operate in the red, must compete with the superpopular iPod and may struggle to attract subscribers beyond the typical first wave of eager users.
XM and Sirius each charge $12.95 a month, require special radio transmitters, which they distribute at a loss, and pay millions of dollars for big-name personalities. In addition, nothing they do, except weather and traffic, is expressly local.
But faced with its own intractable issues, the AM-FM radio industry hasn’t been able to stop the growth of its evil cousins.
By year-end, revenues at XM and Sirius are expected to be up 124 percent and 251 percent, respectively, totaling $548 million and $234 million, according to a forecast by Merrill Lynch broadcasting analyst Laraine Mancini. For 2006, sales will rise 64 percent for XM and 147 percent for Sirius, she estimates.
By contrast, terrestrial radio industry revenue is expected to grow this year by a paltry 1.1 percent. Of course, traditional remains a lot larger than satellite: Industry giant Clear Channel Communications Inc.’s 2004 revenue was $9.42 billion, for example.
Be warned, there will be some bumps for satellite radio. When Sirius’ subscriber numbers disappointed some on Wall Street last month, its stock price fell 5 percent in a day.
This year, total subscribers at XM should reach 6.1 million; for Sirius, 3.1 million. Next year, Mancini expects subscribers to jump to 8.2 million and 5.9 million, respectively. According to Kagan Research LLC, satellite radio reached 3 million subscribers in mid-2004, faster than cable TV or cell phones did after their introductions.
“Satellite radio is a growth oasis within a relatively muted, low-growth investment environment,” said Philip Orlando, senior portfolio manager for the Federated Large Cap Growth Fund, which manages about $220 million and owns about 60,000 XM shares.
Satellite radio’s subscriber growth, Orlando said, is particularly impressive considering that he sees corporate earnings across the broader market rising at roughly 5 percent to 6 percent over the next five years. By 2007, Orlando adds, satellite’s subscriber growth will translate into positive earnings.
But for all the buzz and excitement surrounding satellite radio, stock prices for XM and Sirius have dropped this year by nearly 5 percent and 17 percent, respectively.
Jonathan Jacoby, a broadcasting analyst at Banc of America Securities, attributes the sell-off to fears that the market had gotten ahead of itself–bad memories of the Internet boom.
So what will give either of these companies a bump?
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At a recent Goldman Sachs media conference, Mel Karmazin, the radio industry rainmaker who is chief executive of Sirius, didn’t stand on a table and chant, “Howard Stern is coming, Howard Stern is coming,” but his investor relations manager probably wished he had.
Unquestionably, Sirius is betting big on Stern. The company is spending $500 million over five years for Stern’s program, slated to begin Jan. 1. That money includes such things as salaries and a formidable fourth-quarter marketing campaign trumpeting the arrival of the nation’s most famous shock jock.
XM Chairman Gary Parsons, who appeared at the same Goldman Sachs conference, albeit in a smaller ballroom, recognizes Sirius will gain some ground over the next two quarters but argues that Stern will be good for sales in general.
Sirius needs to add 1 million subscribers to rationalize Stern’s hefty contract. Jacoby, who has a “buy” rating on XM and a “neutral” on Sirius, is cautious.
“I think he’ll bring in a lot [of subscribers]; I just don’t think he’s worth $100 million a year,” he said.
Ultimately, though, fundamentals are what will move XM and Sirius stocks. Investors want to see both companies lower the cost of acquiring new subscribers and make money.
Indeed, Mancini said XM and Sirius are on track to reach free-cash-flow break-even, a crucial milestone for a start-up company. XM should do so earlier next year than Sirius, owing to a generally more favorable cost structure.
“Satellite radio is a viable-model business,” she said. “Compared to the rest of the industry, it’s one of the few growth stories in broadcasting.”
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Leon Lazaroff is a staff reporter at the baiduhai. E-mail [email protected].