Sirius XM Battles for Subscribers

When Erin Patton, a 39-year-old branding consultant in Dallas, traded in his Cadillac Escalade for a Porsche Cayenne in May, Sirius XM nearly lost a subscriber. The Caddy had satellite radio; the Porsche didn't.

So Patton downloaded Sirius XM (SIRI) software for his iPhone. "It was convenient," he says. "I was extremely impressed by some of the functionality," like the ability to buy songs from Apple's (AAPL) iTunes store. Now he's back in the fold. But Sirius hasn't been so lucky with a lot of its customers.

The company reported Aug. 6 that it had lost nearly 186,000 subscribers during the second quarter ended June 30. That was an improvement from the 400,000 subscribers lost in the first quarter, but still not a hopeful sign. Awful car sales during the past year have eaten into the company's subscriber base, as have recession-bitten consumers cutting back. And despite a foray into the world of iPhone software, Internet radio services may eventually make satellite radio superfluous.

Sirius narrowed its second-quarter loss to $171.3 million from $203.5 million a year ago. Revenues grew 1%, to $608 million. But a return to vigorous growth could take a while.

Dwindling Expectations Listeners who downloaded Sirius XM's iPhone app have been mostly existing subscribers who got to use the app for free; the software drew in few new customers. "Cash for clunkers" car buyers aren't getting satellite radio pre-installed in great numbers. And radio personality Howard Stern's contract runs out at the end of 2010, which may take away a key reason many subscribers have for keeping the service. "The outlook for Sirius hasn't changed substantially," says Susan Kevorkian, a program director at market researcher IDC. James Goss, an analyst with Barrington Research Associates, estimates Sirius could lose 1 million subscribers this year, ending 2009 with 18 million.

Tuna Amobi, an analyst with Standard & Poor's, which, like, is owned by The McGraw-Hill Companies (MHP), says "expectations are going to come down" for Sirius' subscription growth. Wall Street analysts expect the company will lose 9¢ per share this year, on sales of $2.45 billion.

The second-quarter results could splash cold water on investors' hopes that the company had turned a corner after a $530 million round of financing from Liberty Media in February staved off the threat of bankruptcy. Shares of Sirius XM had risen 54% since early June. But the shares closed down 1.7%, to 53¢, following the earnings report on Aug. 6. Sirius XM stock fell another 2% in extended trading.

Sirius management was hopeful the worst was behind it. Chief Executive Mel Karmazin told analysts during a conference call that the company can return to rapid subscriber growth. Losses tied to slower automobile sales "appear to have bottomed out," he said. The company is restructuring its advertising department to increase ad sales and preparing to debut a new show from comedian Rosie O'Donnell.

Sirius increased its full-year 2009 guidance for adjusted income from operations to more than $400 million, from $350 million, on account of cost-cutting. "They've exceeded our expectations on expenses," says David Bank, an analyst with RBC Capital Markets, who has a "sector perform" rating on Sirius shares.

While the iPhone app has been a hit with existing users of the service, some of whom have had to buy pricier plans to get it, it's brought in few new subscribers, Karmazin said. The app also lacks such key satellite radio content as shock jock Stern, whom many listeners crave.

Cash for Clunkers Hits Subscribers The federal government's cash-for-clunkers program, which gives consumers who trade in old cars credit for new, more fuel-efficient ones, may also have a muted effect on satellite radio sales. Most trade-in buyers have opted for smaller, less expensive cars that don't come equipped with the radios, according to Efraim Levy, an automotive analyst with Standard & Poor's. Car sales in 2010 should increase 15%, to 11.6 million passenger vehicles. But new auto sales won't start delivering paying subscribers to Sirius until early next year at the soonest, since Sirius offers many car buyers six-month free trials.

What's more, as some Sirius subscribers trade in their cars, the company may actually lose paying customers, at least for a while. Take Rick Wamre. In July, the 51-year-old Dallas neighborhood magazine publisher used the clunkers program to trade in his 1995 Ford (F) Explorer for a new Volkswagen (VOWG.DE) Jetta. That means his old paid subscription turned into a free six-month trial.

Prices are going up, too. This summer, Sirius began tacking on a $2 monthly fee for most subscriptions that covers royalties to the recording industry for songs Sirius plays.

Another wild card: Stern's lucrative contract will run out in 2010. If Stern retires, as he's threatened to do, some of his faithful listeners could drop Sirius' service when he leaves. "I'd make sure that Howard is there," says Sean Ross, who writes a column for the online radio industry newsletter "He is their calling card and the closest thing they've got to a killer app."

More Howard won't come cheap; Sirius paid Stern $500 million for his initial five-year contract, signed in 2004. Then there's the threat from Internet radio services such as Pandora, which can stream music into wireless-enabled cars, such as certain Ford models.

"They have a lot more competition," says Ross. "I expect they will continue to grow, but it will be modest. They are in a rapidly changing world."

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