Sirius Makes Progress In XM’s Shadow

By Paul Dykewicz

Sirius Satellite Radio is the Rodney Dangerfield of satellite broadcasting. The company gets little or no respect, just as the famous American comedian humorously laments about himself as part of his act.

The difference is that Sirius is making changes to differentiate itself from industry leader XM Satellite Radio [XMSR]. The big problem for Sirius is that its first-to-market competitor XM has not stumbled. That reality means that slow-starting Sirius, which needed to change management when its service launch became an endless series of delays, is playing catch up.

The momentum has been with XM since fall 2001. Sirius has been unable to show the same kind of brisk subscriber gains. However, the Sirius subscriber base is growing, totaling 500,749 subscribers to its nationwide service earlier this month. That achievement clearly demonstrates progress.

It is not critically important that XM took less time to reach the same subscriber base. What matters most is that Sirius shored up its finances last year to continue operating and, ultimately, it attained a respectable number of subscribers. The company is projecting it will amass 1 million subscribers by year’s-end.

The company’s latest moves appear to be aimed at attracting new niche audiences. One example is Sirius’ newly unveiled partnership with record-breaking skateboard champion Tony Hawk. Hawk will become the first host on “Sirius Faction,” an innovative music channel created for action-sports enthusiasts. “Tony Hawk’s Demolition Radio” will broadcast from a custom-designed studio at his new practice facility in California.

Prestige, Luxury, Premium

A further step forward is the company’s agreement for its service to be given expanded availability in “prestige” and “luxury” vehicles rented to customers of Hertz Corporation. That arrangement helps Sirius project the image of a premium service that is worth the roughly $3 extra its subscribers pay per month compared with the monthly charge for XM service.

The premium-brand image was cultivated further by Porsche Cars North America agreeing to make Sirius available this month as a factory-installed option on all 2005 Porsche Cayenne models sold in the United States. Sirius will be available on the 2005 Cayenne, the Cayenne S and the Cayenne Turbo vehicles.

A breakout content move involved the company’s new partnership with multi-platinum recording artist Eminem, Shady Records and Interscope Records to create a cutting-edge hip- hop music and lifestyle channel. The new channel will feature music from across the hip-hop landscape, along with programming created by top artists and DJs. In addition, a weekly show by Eminem’s DJ, Green Lantern, will spotlight the freshest mixes, and it will include occasional hosting appearance from Eminem as well as acts from the Shady Records talent roster. The channel is on tap to debut this fall, and it will be offered to all Sirius customers at no additional charge.

Speculation is rising that shock jock Howard Stern may be contemplating a move to satellite radio. Whether either XM or Sirius could offer Stern an enticing enough financial package to lure him onto its airwaves is a big question. Stern’s existing contractual arrangements also pose an obstacle. However, Sirius is based in New York City, where Stern has staked out his unique niche in as a syndicated morning drive time host. Even rumors that Stern could make the jump to satellite radio helps to add buzz to the sector. XM and Sirius can only benefit from having their companies viewed as viable landing spots for the disgruntled Stern.

The Money Front

On the financial front, since June 1, the stock valuations of XM and Sirius have diverged. While XM’s stock price rose 9 percent, the price of Sirius’ stock fell 9 percent. An indicator that better days may be ahead for Sirius and its stock is that the company now is trading at a 28-percent discount to its discounted cash flow, according to a report written earlier this month by SG Cowen’s Tom Watts. The company’s current stock price gives a valuation of $611 for every Sirius subscriber, compared to $800 for each XM subscriber, he noted.

Further good news that could aid Sirius’ stock price may come in the form of big announcements that Daimler-Chrysler is stepping up its sale of factory-installed Sirius equipment in its vehicles, similar moves in the same direction by Ford [F] and stronger aftermarket subscriber gains, Watts wrote. However, Watts is a bit more conservative in his estimate for Sirius’ year-end subscriber total than are the company’s own executives. He expects 900,000 subscribers by the end of the year, while the company is not backing off its target of 1 million.

Satellite News likes the aggressive approach Sirius CEO Joe Clayton has taken in trying to differentiate his company from XM. He took a gamble by paying a whopping price for the rights to NFL games as part of a multi-year contract that is back-loaded to give the company financial breathing space while it tries to reach cash flow breakeven. However, risks are a part of business, and sometimes the buzz created by a big announcement can spur sales. We expect Sirius to gain substantial marketing muscle from its NFL deal, and we would add that factor to the list of potential catalysts that might spur the company’s second-half 2004 subscriber gains.

Don’t be surprised if Sirius hits the 1-million subscriber mark by the time the year ends. The company is gaining traction. Sirius is looking increasingly like a long-term survivor, and it also is making the moves one would expect of a worthy XM rival.

Paul Dykewicz is senior editor and senior analyst of Satellite News. He can be reached at 301/354-1769 or at [email protected].