Sirius CEO Defends Costly NFL Pact

The $220 million that Sirius Satellite Radio [NYSE: SIRI] agreed to pay to offer National Football League (NFL) games for the next seven years starting this fall should pay off by spurring sports-loving fans to become new subscribers, said Joseph Clayton, the company’s president and CEO.

In an exclusive interview with SATELLITE NEWS, Clayton said he believes that the NFL programming will boost subscriber sales at Sirius the same way that the “NFL Sunday Ticket” programming has spurred subscriber numbers for DirecTV. Officials at satellite radio leader XM Satellite Radio [Nasdaq: XMSR] countered that they did not believe a sufficient return on investment (ROI) would be possible to justify the hefty price of the contract that includes an equity stake in Sirius.

Undaunted, Clayton said the NFL deal would raise the “tide” for Sirius’ growth. “We will be a force to be reckoned with,” he added.

The NFL deal, combined with programming from other U.S. professional sports, is helping to turn Sirius into the satellite radio service of choice for serious sports fans, Clayton said. In addition, Sirius is trying to distinguish itself by offering commercial-free music, whereas rival XM carries advertisements on a number of its music channels.

The contract for the NFL programming is “back-loaded” so that Sirius will not have to pay large sums of money during the early years, Clayton said. Sirius would need to pay $10 million in cash during the first year of the seven-year agreement (SN, Dec. 22, 2003). The price for Sirius shareholders could be higher than $220 million if the NFL redeems warrants for 50 million shares at an exercise price of $2.50 per share and dilutes the value of existing shares. The NFL only can use the warrants if it delivers “compelling” advertising, marketing, promotional exposure and content on NFL radio for Sirius, according to the satellite radio company’s 10-Q document filed Dec. 16 with the Securities and Exchange Commission (SEC).

“The economics pass the sanity test,” Clayton said. However, he declined to discuss how many additional subscribers Sirius would need to generate from the NFL deal to cover its cost.

Tom Watts, a satellite analyst with SG Cowen, said the price paid by Sirius could be recouped if roughly 440,000 subscribers are added over the lifetime of the pact. Sirius’ monthly subscription price of $12.95 contributes $8.97 a month to the company’s bottom-line when variable costs are factored out, Watts said.

Watts’ reasoning is that the average Sirius subscriber would generate $578 before dropping the service, if the monthly churn rate was 1.5 percent. If cost per gross addition estimated at $134 for 2005 is subtracted, the average subscriber would generate an estimated $444 for Sirius. Watts calculates that 495,000 subscribers would be needed to pay off the $220 million cost of the deal if each subscriber generates $444.

If Sirius subscribers enticed by the NFL programming prove to be less likely to drop the service than the norm, the number of new customers needed to reach the payback level would be less than 495,000. For a payback in one year, 2.1 million subscribers would be needed, Watts added.

“Our view is that the company can afford it,” Watts said. The NFL programming gives Sirius another way to differentiate its service from XM.

People need a reason to buy Sirius for $12.95 a month rather than pay just $9.99 a month for XM, Watts said. Combined with Sirius’ commercial-free music channels, the NFL deal is “one more way” to erase the perception that both satellite radio companies are largely the same, he added.

Sirius raised $150 million in November to help cover the cost of the NFL deal, as well as to support retail and automotive distribution, Clayton said.

Clayton was confident that the alliance with the NFL will pay off in the end. If each of the 32 teams in the league generated an average of 5,000 subscribers a year among their fans, Sirius would generate 160,000 subscribers annually and 1.12 million subscribers in total by the end of the seven-year pact.

The pact allows the NFL to become a shareholder in Sirius and includes the right to buy warrants for additional shares, giving the league further incentive to boost the satellite radio company’s subscriber base, Clayton said.

That partnership allows Sirius advertisements to be aired on the local broadcasts of NFL teams. The teams gain by offering their fans nationwide access to the games through Sirius.

The passion of NFL fans extends year-round, Clayton said. “If you are a fan, you have an insatiable desire to hear about your favorite team.”

XM’s View

Chance Patterson, XM’s vice president of corporate affairs, said his company looked at the NFL programming opportunity “closely” but was not willing to invest the amount of money that Sirius committed.

When the price passed a certain point, XM backed away. The sticking points involved the huge total cash outlay and the NFL’s interest in obtaining XM equity as part of the deal, Patterson said.

“We are concerned about ROI and potential dilution. Both factored into our evaluation of the opportunity.”

The NFL is a “strong brand,” Patterson conceded, but he wondered if there are that many additional radio listeners to tap. “More than 800 radio stations across the country carry local games,” Patterson said. “Listeners in those areas don’t vary at all.”

Fans in a local area might not want to pay $12.95 a month to subscribe to Sirius when the same game would be available on traditional radio for free, Patterson said.

“We don’t have any present plans to offer NFL games. We are interested in giving consumers what they can’t get anywhere else. We continue to focus on live music programming. High quality music programming is what is missing on local radio,” Patterson said.

Research surveys show that music is what the majority of consumers want, Patterson said.

“We don’t view this NFL deal as a meaningful difference maker, particularly given that NFL programming is widely available on local television and radio nationwide,” Patterson said. “We are more confident than ever that our strategy is a great one.”

Consumers are choosing XM in greater numbers than Sirius and the trend has been continuing since both companies launched service. XM topped the one million-subscriber mark in late October.

A key obstacle for Sirius is that it lacks “meaningful” factory-installed distribution agreements with automobile manufacturers, Patterson said. XM is focused on continuing to drive the success of its factory-installed subscriber base through General Motors [NYSE: GM] and Honda [NYSE: HMC]. XM is a factory-installed option on more than 40 new GM models, as well as a standard feature on several top-selling Honda and Acura models. Factory-installed radio units in the automotive market account for 50 percent of XM’s new customers.

Sirius reached the 200,000-subscriber milestone on Dec. 8 and was projecting robust sales for the holiday season. “For a company that is not supposed to be a factor, I think we’re doing really well,” Clayton said.

XM’s early start and partial ownership by General Motors put XM ahead of Sirius in tapping the market potential for factory-installed vehicles. Sirius is trying to catch up but has not enjoyed the same support with its automobile-manufacturing partners – BMW, Ford [NYSE: F] and DaimlerChrysler [NYSE: DCX].

Clayton acknowledged that Sirius’ factory-installed distribution channel is “lagging” behind XM. “We will go slower than GM and XM,” Clayton said. Over the long term, Sirius could have an edge because its deals with Ford, DaimlerChrysler and BMW account for roughly 43 percent of the new vehicles sold each year in the United States, compared to just 29 percent for GM. –Paul Dykewicz

(Jim Collins, Sirius Satellite Radio, 212/584-5110; Chance Patterson, XM Satellite Radio, 202/380-4318; Tom Watts, SG Cowen, 212/278-4260)