Serious Threats to Sirius Radio

Timothy Der, a software engineer who lives in Los Angeles, was a fan of Fungus 53, a punk radio station on XM Satellite Radio. Alas for Der, Fungus 53 went off the air months after the July 2008 merger of XM into satellite radio rival Sirius. So Der canceled his subscription and switched to Internet radio.

Der purchased Slacker G2, a $200 portable radio that plays just the kind of music he likes. The player downloads content from Slacker's custom-made punk Web radio stations via Wi-Fi connections. The radio stream is stored on the player's 4GB of memory, so Der can listen to the music in his car and at home—spots where he once played XM. The sound quality is better, he reports. As for content, "It's not all there, [Slacker's] music selection isn't as wide," Der says. "But it's pretty close."

For Sirius XM Radio (SIRI), such migrations spell trouble.

Since its inception, satellite radio bragged that unique content represented a key competitive weapon in the crowded digital media market. Just last year, former rivals Sirius and XM spent a combined $446.6 million on programming and content alone. Sirius XM pays $100 million a year to shock jock Howard Stern and his team, for example, and $60 million annually to Major League Baseball. But as Web radio and mobile radio applications flourish, they are beginning to erode the value of Sirius's pricey content deals.

Cheaper—or Even Free

Companies like the Web radio service Pandora, Foneshow, Stitcher, and Slacker—as well as traditional content providers—are broadcasting portable and mobile content that is cheaper or even free. Moreover, these upstarts can often replicate Sirius programming. One example: On Mar. 30, MLB will release an iPhone (AAPL) mobile application that will stream games live from all 30 teams—which is what Sirius customers get now—and offer video clips and live score updates for $10 for the entire season. Sirius' subscriptions that include MLB games start at $10 a month. The new app doesn't violate baseball's contract with Sirius XM, which covers rights to stream games only on satellite radio.

For Sirius XM, this competition over price and content comes at the worst possible time. The company is looking to monetize its content through mobile phones to complement its traditional outlets. Auto sales, which have fueled Sirius's subscriber growth for several years, have slowed to a crawl. Ditto for retail store sales now that electronics retailer Circuit City is gone. Even worse, many consumers have slammed their wallets shut amid the recession.

Satellite's Decline

Now, new rivals are making Sirius look overpriced and stodgy. "I use Pandora with Wi-Fi a lot in campus, office, and home settings," says Andrei Jezierski, a consultant who lives in New York. "If it's unavailable, [there's] plenty of stored, synced-up music on the iPod itself."

It's the iPod, Slacker, and a slew of other offerings that threaten Sirius. "There are definitely questions right now about that business model and whether it can withstand the current challenges," says Tuna Amobi, an analyst with Standard & Poor's, which, like, is owned by The McGraw-Hill Cos. (MHP). To find growth, New York-based Sirius must change from a satellite radio company into one that offers pure content through new distribution channels, such as mobile, says Susan Kevorkian, a program director at researcher Interactive Data (IDC). In the coming years, some analysts say expensive satellites could well fade as a distribution medium as wireless networks improve.

Sirius XM plans to release its long-awaited iPhone application in the second quarter. The application will be available for free to subscribers who pay for Sirius' $13 monthly online streaming package and for $3 extra per month to those who subscribe to other Sirius plans. "This could very rapidly grow penetration of Sirius-enabled devices," Kevorkian says. "It offers the possibility of expanding internationally." Problem is, mobile applications like the new one from MLB are opening cheaper access to the same content.

Sirius declined to comment for this story.

Outgrowing the Trouble?

The company has long argued that it could take years for wireless networks to improve enough to be able to stream radio in every corner of the U.S. It also points out that it retains exclusive programming, such as Howard Stern. Bob Bowman, chief executive of, the league's Internet unit, says mobile programming could simply supplement radio and television. "I do believe no new medium kills the old medium," Bowman says. Liberty Media (LMDIA), which lent Sirius XM $530 million in February, isn't worried, either. "They are going to grow themselves out of this difficult environment," says Greg Maffei, Liberty's president and CEO. "That fundamentally was a very attractive consumer service that has a lot of growth once the market recovers."

In its latest quarter, Sirius added a net 82,945 subscribers—down from 1.1 million in the same quarter of 2007. Growth could pick up if the radio service were to be bundled with DirecTV (DTV), in which Liberty also holds an ownership interest. The two satellite companies could also cross-market to each other's subscribers. Liberty, which has a 40% stake that is convertible to Sirius XM shares, is also working with the company on a business plan aimed at cutting costs, such as Sirius's talent fees. "They can build a very attractive business," Maffei says.

Still, it's hard to fathom Stern taking a huge pay cut when his Sirius XM contract expires at the end of 2010. He has said he may retire then, but he also may shop around for a better offer if Sirius decides not to pay. Competing terrestrial radio companies, most of them loaded with debt, may have trouble coughing up Stern's salary, even though the talk show host enjoys a fiercely loyal listener base. "Howard Stern is a unique entertainer and a very valuable contributor to the Sirius XM family," says Maffei. Amobi calculates that Stern contributed roughly 2 million of Sirius XM's 19 million subscribers. While a near-10% customer base is worth plenty, Sirius may well decide it is not worth $100 million annually.

Custom Programming

Aside from Stern, some of Sirius' 69 music channels have already been replicated online. Fans of the radio customization site Slacker say they have reconstructed 17 channels, including U.S. Country (XM17) and Beyond Jazz (XM72). While Slacker became available on mobile phones only this year, as much as 40% of its 1 million monthly listeners comes from mobiles, says Jonathan Sasse, Slacker's vice-president for marketing. The service is free for those willing to listen to 30 seconds to two minutes of advertising per hour. For $3.99 a month, Slacker has no ads and allows song skipping.

Meanwhile, iPhone users can now listen to talk shows through a service called Stitcher. (It is launching for BlackBerry (RIMM) devices in April.) The San Francisco company's software grabs RSS feeds from online podcasts, such as those from Oprah, Fox News (NWS), and BusinessWeek, and allows users to "stitch" together custom radio channels of news and talk shows. Stitcher users listen to 5 million minutes of radio a month, up from 1 million last August, and is on track to reach 1 million users by the end of 2009, says Mike Ghaffary, Stitcher's vice-president for business development.

Another option: Foneshow lets any phone with text messaging capabilities to catch custom talk radio programming, like Bill Press and Thom Hartmann. Whenever a new show segment becomes available, your phone receives a short text message with a link. You hit "Send," and your phone starts streaming audio, which you can pause, skip or forward to a friend. Foneshow sells advertising, unlike Sirius.

Marketing Muscle

But there's an ads-free option: This summer, a Michigan startup called Myine Electronics, begun by two former satellite radio hardware engineers from electronics maker Delphi, will launch a device called Abbee. The $250 gadget scans FM stations and records songs onto an internal hard drive while erasing all commercials. The gadget has a cable for use in a car, the domain of satellite radio.

How much these innovations erode Sirius's advantage remains to be seen. Sirius has marketing muscle that most startups lack. And Maffei notes that online providers have yet to formulate a path to profitability since most have no steady subscription streams. (On the other hand, Sirius XM lost $248.5 million in the fourth quarter.) "Internet content providers like Pandora are showing enormous growth," Maffei says. "What their long-term success is in mobile venues and automobiles remains to be seen."

But in many respects, that statement could apply to Sirius XM—as listeners like Der demonstrate by going online.

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