Satellite Radio Shoots The Moon

Dueling XM and Sirius are betting huge sums, but profits are still far off

The satellite radio wars are heating up. Every week seems to bring another attempt by XM Satellite Radio Holdings Inc. (XMSR ) and Sirius Satellite Radio Inc. (SIRI ) to outdo each other. On Oct. 6, Sirius announced it had lured shock jock Howard Stern from broadcast radio in an exclusive five-year, $500 million cash and stock deal that starts in 2006. Two weeks later, XM counterpunched, announcing a $650 million, 11-year deal to air Major League Baseball.

In a matter of a month, XM and Sirius have together committed more than $1 billion for programming, in an all-out effort to entice listeners to pay $10 to $13 a month for their services. That's a lot of loot for a pair of companies that have yet to make a dime in profits. As if a reminder was necessary, on Oct. 27 Sirius reported that its third-quarter net loss widened by nearly 60% to $169.4 million.

Are the two satellite radio pioneers overreaching? While analysts don't expect either company to generate profits until 2008 at the earliest, they argue that the combination of more compelling programming and the increasing ubiquity of the radios in new car models could help turn satellite radio into a viable media business. Investors seem to agree: XM's stock price surged 70% over past 12 months, to $32.50, while Sirius, with a much smaller market cap, has more than doubled, to about $4. Satellite radio, says Anthony Valencia, a media analyst at L.A.-based TCW Group, one of XM's top institutional investors, "is affordable, and with its content and choice, more people over time will subscribe to the service."

Can XM and Sirius survive long enough to lure a critical mass of subscribers? Both companies have taken on plenty of debt to finance the programming sorties. XM now has $710 million of debt on its books; Sirius $426 million. But both also have plenty of cash. Sirius has tapped the capital markets six times in the past 18 months and is now sitting on a cushion of more than $800 million; XM has a cash hoard of $377 million. And so far the burn rate seems sustainable: SG Cowen & Co. expects XM to go through about $200 million over the next two years. What's more, analysts say, both companies have probably completed their most expensive programming deals.


Getting the programming right will be key. That's where Stern comes in. He draws about 12 million loyal listeners in more than 40 cities, and analysts believe Sirius will need to sign up just 1.7 million of those fans to break even on its investment by 2007. For its part, XM is betting on the MLB deal to draw folks who want to listen to games that aren't available on local radio. XM, which expects to have 3 million subscribers by yearend, will need to lure 1.6 million more to break even over the 11-year term of the MLB deal, reckons Bear, Stearns & Co. (BSC ) analyst Robert Peck.

Just as important will be persuading auto makers to make satellite radio standard. Right now XM has the edge, with radios in 103 models. General Motors Corp. (GM ), which owns 5.2% of the company, offers the radios as an option in 90% of its North American models. Honda Motor Co. (HMC ), which holds an 8.2% stake, has installed the technology in eight models. By contrast, Sirius will be in 50 DaimlerChrysler (DCX ), BMW, and Volkswagen models by yearend. Ford Motor (F ), meanwhile, expects to have Sirius radios in 20 models within two years. On high-end models, the technology is standard at no extra cost to the buyer, while on many vehicles satellite radio is part of a package that often includes a CD player and sunroof.

XM and Sirius believe that with 200 million cars and light trucks on U.S. roads and roughly 16 to 17 million new vehicles sold each year, the potential market for satellite radio is huge. And with 57% of the folks who buy satellite radio-equipped models signing up for the service, they could be right.

By Tom Lowry in New York, with Catherine Yang in Washington and bureau reports

— With assistance by Catherine Yang

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