Sirius XM's Subscriber Drain

Investors put up with financial losses at Sirius XM so long as it and predecessor companies were posting subscriber growth. But now the satellite radio provider is contending with losses in both areas, and investors mind a great deal.

On May 7, Sirius XM (SIRI) said it lost 404,000 subscribers, or 2% of its user base, in the first quarter, the first-ever quarterly loss in satellite radio history. Sirius XM blamed weak retail sales and poor demand for autos that come outfitted with satellite radios.

The miss caught investors off-guard. Sirius lost 37,604 new car-related customers in the quarter; Standard & Poor's analyst Tuna Amobi expected the company to add about 100,000 new car subscribers. Sirius XM's shares fell 18.14%, to 43¢.

Worse still, the company's subscriber losses may not be over. Many analysts now expect Sirius XM to shed subscribers in the second quarter as well as retail sales remain in the doldrums and auto industry woes deepen. Sirius XM partner Chrysler has temporarily shut all of its factories while it navigates bankruptcy.

General Motors (GM), which also installs Sirius XM devices in its cars, will close a dozen plants temporarily this summer. Sirius XM's new-car-related sales could remain under pressure for months, analysts say. If GM ends up filing for Chapter 11, Sirius could hemorrhage subscribers though mid-2010, Amobi says. If GM's troubles intensify, "that could accelerate losses," he says.

A Litany of Bad Breaks

Sirius CEO Mel Karmazin tried to concentrate investors' attention on the company's financial progress. "There was a time when the focus was on adding subscribers at any cost," he said during a conference call with investors and analysts. "Today, with our strong subscriber position, all of the [carmakers] signed to long-term contracts, and a complete content offering, our focus is on making money." Problem is, with subscriber growth slowed, Sirius may also have a harder time meeting its financial goals.

The company may not reach positive free cash flow, a measure of profitability, until late 2010 or even 2011, Amobi says. Sirius still has network upgrades and substantial interest payments to Liberty Media, which recently invested $530 million. "That could push them back [in getting to free cash flow] as well," Amobi says.

Some moves aimed at generating cash could also undermine efforts to lure customers. To slash costs, Sirius XM has cut shows and stations, alienating some users. In March the company began charging an extra $2.99 for streaming its content online, a service that used to be free. It also raised prices for subscribers using multiple radio devices, from $6.95 to $8.99 a month. "We took actions over the last several months that we knew would adversely affect some subscribers, but we implemented them, as it was the right decision from a financial viewpoint," Karmazin said.

The company may also have suffered from bad publicity. Rumors of an imminent bankruptcy swirled around Sirius earlier this year, before the Liberty deal was announced, as Sirius needed to find additional funding to meet its debt obligations. "They might have been hurt by the confusion in the marketplace," says David Bank, an analyst at RBC Capital Markets.

A Free iPhone App Will Help

When the economy rebounds and consumer demand revives, subscriber losses may abate. The company would also benefit from adding high-profile radio talent; Howard Stern, who took up with Sirius from traditional radio, is one of the company's most popular personalities. "Most people who've followed Howard are already there," says Sean Ross, vice-president for music and programming at consultant Edison Research. "If they are looking for more bodies, they need to add more things." But talent costs money. And investors probably won't let the company spend anything close to the $100 million a year it's paying for Stern and his team.

Sirius also needs to figure out how to rev up retail sales through new partners, especially in light of the bankruptcy of Circuit City. "Certainly, Circuit City's bankruptcy did not help us during the period of time," Karmazin said. "You know, a lot of their customers at Circuit City moved to Wal-Mart (WMT). You know, Wal-Mart customers have historically not been the best customers, based on their churn and habits for satellite radio."

Sirius XM may get a lift from its planned free application for the Apple (AAPL) i­Phone and iPod Touch. Expected to become available in the second quarter, the app would bring Sirius XM service to users in countries not currently covered. "At a minimum it'll be a great benefit to existing subscribers," says Murray Arenson, an analyst at Janco Partners.

And Sirius needs to give existing customers all the benefits it can.

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