Thursday, February 12, 2009

Not Surprised: Sirius XM Financial Orbit Decaying

According to the New York Times, recently merged satellite radio company Sirius XM is nearly bankrupt.

The short term reasons for their financial crisis are simple - they have a ton of debt they need to refinance. For fairly obvious reasons, this isn't a great time to try to refinance millions of dollars of debt. Especially given their past performance.

Another is their primary method of acquiring new subscribers has been through the sales of new cars and trucks. Again, not a great time to be looking for customers there.

But there are deeper, more fundamental reasons why their business is in trouble. Many of their choices have been extremely expensive, which has placed them in a position of needing unrealistic scale for their business.

Sirius XM rely on satellites launched into space to provide service. Launching satellites into space is expensive and risky. As regular readers know, I have a general rule about investing - when someone approaches me with an opportunity that involves launching things into space, I run the other way.

Due to the massive cash outlay to get started with the satellites, the company needed to achieve scale quickly, so they spent something like $500 million (combined) on advertising to drum up business - remember those awesome David Bowie ads?

When that didn't drive traffic fast enough, Sirius resorted to spending lots of money to pull Howard Stern off regular radio and into satellite. It definitely helped their business in the short term but set a bad precedent (excessive valuation of talent) and again drove them to need even more subscribers.

Finally, the fundamental nature of their product is a problem. They require dealing with the music content cartel, which charged them an arm and a leg for permission to broadcast music. Satellite radio isn't actual "terrestrial radio" and thus requires its own set of negotiated deals. This put huge limits on the amount that Sirius XM could expect to make. If the deals they got are anything like the Internet music business, Sirius XM was never going to make significant cash.

Sirius XM requires the listener to purchase a special receiver to get the transmissions. Initially, these receivers were around $200, which isn't cheap. Especially compared to an iPod or FM radio. iPods provide more control and FM radio is free (if annoying as hell). On top of buying a receiver, listeners had to pay a $10-ish monthly fee (like cable TV or Rhapsody).

All to get about 100 channels, most of which you're not interested in.

Their service is fine - the sound quality is adequate (but not more than adequate) and if you like the radio model of "we'll play a bunch of music at you", they do a pretty good job, with a larger pool of songs than regular radio (but not as large as Internet radio) picked by "radio experts".

And then there's the Internet. Sirius XM operates on an old-school broadcast model. The youth of today aren't into tuning into the same stuff everyone else is. They want a custom feed they control and the ability to check out what their friends are listening to. Music lovers today are used to iPods and control, cover art, ratings, and of course, the ability to listen anywhere they can get WiFi.

Sirius XM is a poor fit in that world, and that, combined with their inherent and short term prices, probably means they'll file for bankruptcy and disappear. Like Iridium, the "world phone" provider (another satellite investment company) their satellites will end up silent, used for other purposes, or smash into other satellites.

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