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Sirius Satellite Radio (SIRI)Stock (Broadcasting - Radio Industry, Media & Entertainment Industry, Telecommunications Industry)
 Sirius Satellite Radio (NYSE: SIRI) is licensed to provide satellite radio in the United States, providing subscription satellite radio to 8.6 million customers before they bouth XM Satellite Radio Holdings (XMSR) . Sirius has bought XM for $2.76B and the combined company, Sirius XM Radio, has 18.5M listeners. Beyond the merger with XM, there are several other notable trends or factors that now impact Sirius and others that could potentially affect it in the future. These include contracts with OEM automobile manufacturers to provide satellite radio in new cars, programming content, and the use of iPods in automobiles.
[edit] Company Overview Sirius began providing satellite radio service in the United States 2002. Since then, the company has grown its subscriber base to nearly 8.3 million subscribers. Sirius broadcasts over 130 channels of digital high-fidelity radio, spanning sports, news, talk shows, entertainment, religious services, and traffic and weather reports. Given that its lineup includes 69 commercial-free music channels, Sirius earns more than 90% of its revenue through subscriptions, with the remainder coming from advertisements and Sirius-branded satellite radios and other hardware accessories. Other Services Offered By Sirius Internet Radio Sirius offers subscribers the ability to listen to our music channels and select non-music channels over the Internet as part of our base subscription price. SIRIUS Internet Radio, which is referred to as SIR, delivers a simulcast of more than 80 channels of talk, entertainment, sports and music programming for a monthly fee. Subscribers to SIR are included in subscriber counts. Commercial Accounts SIRIUS Music for Business, is a music service for commercial establishments, and is available through Applied Media Corporation, Dynamic Media, Turn Key Media and Info Hold Inc. Subscribers to commercial accounts are included in subscriber counts. SIRIUS Backseat TV In 2007, Sirius introduced SIRIUS Backseat TV, a television service offering content designed primarily for children from Nickelodeon, Disney Channel and Cartoon Network in the backseat of vehicles. Chrysler was the only automaker to offer SIRIUS Backseat TV in its 2008 model-year vehicle lineup. Aftermarket units capable of this service were introduced in the Fall of 2007 through Directed Electronics. Subscribers to SIRIUS Backseat TV are not included in subscriber counts. Travel Link In 2008, Sirius will launch SIRIUS Travel Link, a suite of data services that includes real-time traffic, tabular and graphical weather, fuel prices, sports schedules and scores, and movie listings. SIRIUS Travel Link is expected to be standard on Ford’s next-generation navigation system and is anticipated to be offered on select Ford, Lincoln and Mercury vehicles in 2008. Subscribers to SIRIUS Travel Link are not included in subscriber counts. Traffic and Weather Sirius offers a service that provides graphic information as to road closings, traffic flow and incident data to consumers with in-vehicle navigation systems. The service reports incident information for 80 cities and traffic flow information for 26 cities. Traffic flow information is expected to expand to 77 cities in 2008. Sirius sources these reports from a provider of mapping and traffic data. Subscribers to this service are not included in subscriber counts. Sirius also offers a marine weather service, featuring detailed information ranging from weather and wave heights to sea surface temperatures, for recreational boaters. The service integrates data information directly into certain marine electronics products. This marine weather service covers the 48 contiguous states and waters extending hundreds of miles into the Atlantic and Pacific Oceans, Gulf of Mexico and Caribbean. Sirius also owns part of Sirius Canada, which provides over 110 channels of satellite radio to consumers in that country. Sirius Canada is co-owned by Canadian Broadcasting Corporation and Standard Radio Incorporated, both of which share revenue from Canadian operations with Sirius. Sirius Canada has over 500,000 subscribers as of October 2007. However, Sirius Canada subscribers and revenue are not included in Sirius's financial releases so detailed information about Canadian operations are unavailable. Sirius has seen revenue grow exponentially in the past four years from $66 million in 2004 to $922 million in 2007 as subscriptions have increased. The increasing number of subscriptions is attributed to several factors, including deals with automobile manufacturers and car rental companies to include Sirius satellite radios in their cars and popular programming additions such as Howard Stern. Despite growing revenue, Sirius's costs are still far higher than its revenue so the company operates at a loss. The bulk of Sirius's expenses come from subscriber acquisition costs and expenses incurred by programming content contracts and marketing efforts. Also, Sirius is still managing its large debt load from the extensive investments required to get its service off the ground, including the purchase and launch of satellites and the establishment of ground-based repeaters. MANAGEMENT Mel Karmazin has served as our Chief Executive Officer and a member of the board of directors since November 2004. Prior to joining Sirius, Mr. Karmazin was President and Chief Operating Officer and a member of the board of directors of Viacom Inc. from May 2000 until June 2004. Prior to joining Viacom, Mr. Karmazin was President and Chief Executive Officer of CBS Corporation from January 1999 and a director of CBS Corporation from 1997 until its merger with Viacom in May 2000. He was President and Chief Operating Officer of CBS Corporation from April 1998 through December 1998. Mr. Karmazin joined CBS Corporation in December 1996 as Chairman and Chief Executive Officer of CBS Radio and served as Chairman and Chief Executive Officer of the CBS Station Group (Radio and Television) from May 1997 to April 1998. Prior to joining CBS Corporation, Mr. Karmazin served as President and Chief Executive Officer of Infinity Broadcasting Corporation from 1981 until its acquisition by CBS Corporation in December 1996. Mr. Karmazin served as Chairman, President and Chief Executive Officer of Infinity from December 1998 until the merger of Infinity Broadcasting Corporation with Viacom in February 2001. Scott A. Greenstein has served as President, Entertainment and Sports, since May 2004. Prior to May 2004, Mr. Greenstein was Chief Executive Officer of The Greenstein Group, a media and entertainment consulting firm. From 1999 until 2002, he was Chairman of USA Films, a motion picture production, marketing and distribution company. From 1997 until 1999, Mr. Greenstein was Co-President of October Films, a motion picture production, marketing and distribution company. Prior to joining October Films, Mr. Greenstein was Senior Vice President of Motion Pictures, Music, New Media and Publishing at Miramax Films, and held senior positions at Viacom Inc., a diversified media and entertainment company. James E. Meyer has served as President, Sales and Operations, since May 2004. Prior to May 2004, Mr. Meyer was President of Aegis Ventures Incorporated, a consulting firm that provides general management services. From December 2001 until 2002, Mr. Meyer served as special advisor to the Chairman of Thomson S.A., a leading consumer electronics company. From January 1997 until December 2001, Mr. Meyer served as the Senior Executive Vice President for Thomson as well as the Chief Operating Officer for Thomson Consumer Electronics. From 1992 until 1996, Mr. Meyer served as Thomson’s Senior Vice President of Product Management. Mr. Meyer is a director of Gemstar-TV Guide International, Inc. Patrick L. Donnelly has served as Executive Vice President, General Counsel and Secretary since May 1998. From June 1997 to May 1998, he was Vice President and deputy general counsel of ITT Corporation, a hotel, gaming and entertainment company that was acquired by Starwood Hotels & Resorts Worldwide, Inc. in February 1998. From October 1995 to June 1997, he was assistant general counsel of ITT Corporation. Prior to October 1995, Mr. Donnelly was an associate at the law firm of Simpson Thacher & Bartlett LLP. David J. Frear has served as Executive Vice President and Chief Financial Officer since June 2003. From July 1999 through February 2003, Mr. Frear was Executive Vice President and Chief Financial Officer of Savvis Communications Corporation, a global managed service provider, delivering internet protocol applications for business customers. From October 1999 through February 2003, Mr. Frear also served as a director of Savvis. Mr. Frear was an independent consultant in the telecommunications industry from August 1998 until June 1999. From October 1993 to July 1998, Mr. Frear was Senior Vice President and Chief Financial Officer of Orion Network Systems Inc., an international satellite communications company that was acquired by Loral Space & Communications Ltd. in March 1998. From 1990 to 1993, Mr. Frear was Chief Financial Officer of Millicom Incorporated, a cellular, paging and cable television company. Prior to joining Millicom, he was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse.  
[edit] Merger is ApprovedThe FCC has decided, 3 to 2, that the XM-Sirius merger will be approved based on some conditions. The FCC says that they have reached an agreement in principle to allow the merger. The agreement is based on similar terms to what FCC Chairman Kevin Martin proposed in June 2008. These terms would require XM and Sirius to place a cap on prices for three years, offer selective programming, make radio channels available for noncommercial and minority programming, and provide the option of buying radios that receive both XM and Sirius.[1] [edit] Trends and Forces[edit] Auto Maker/OEM ContractsSirius generates more than 90% of revenue through subscriptions, and a fast growing source is through deals with OEM automobile manufacturers, which install Sirius radios within cars. In order to capitalize on this, Sirius has pursued deals with many major automobile companies in recent years, and in 2007, approximately 44% of Sirius's subscribers were from OEM automobile sales. Sirius has contracts with many major automobile manufacturers to include Sirius radios either as a standard feature or option, some including limited or lifetime subscriptions. Sirius shares a portion of subscription revenue with the automobile companies.
Sirius radios are also currently options available in vehicles from Subaru, Toyota Motor (TM), Lexus, Scion, Maybach, and also has a deal with Hertz Car Rental. Trucks Freightliner, Sterling, Peterbilt, Kenworth, Volvo and International offer SIRIUS radios as a factory-installed option on the trucks they manufacture. Boats Various recreational boat builders, including Sea Ray, Four Winns, Chaparral, Larson, Glastron, Ranger and Formula, offer SIRIUS radios and a prepaid subscription to their service as a standard or optional feature on their boats. Recreational Vehicles Several leading manufacturers of recreational vehicles, including Fleetwood, Monaco, Winnebago, Coachmen, Tiffin and Alfa Leisure, offer SIRIUS radios as a factory-installed option.
 [edit] Programming content qualityA crucial facet of Sirius's satellite radio service is the programming content with which it provides its subscribers. Sirius has a wide range of audio content that attracts consumers to its service. In addition to over 65 channels of music, Sirius features over 60 channels that cover sports, news, entertainment, and other topics. In 2007, Sirius spent $236 million (17% of revenue) on programming and content for their service. This is significantly less than the $550 million (or 87% of revenue) the company spent in the same area during 2006. The quality and diversity of its programming is integral to Sirius in its quest to gain new subscribers and keep its current subscribers from ending their service. Content additions such as the NFL and Howard Stern correlated with a significant number incremental subscriptions. [edit] Sports coverage
[edit] Howard SternIn October of 2004 Sirius signed popular radio talk show host Howard Stern to a five-year $500 million exclusive contract to host a show four days a week on Sirius satellite radio starting in January 2006. Stern is one of the most popular media figures in modern history, with his terrestrial radio show being ranked #1 in many major cities throughout the country before he switched to Sirius in 2006. A large, albeit incalculable, portion of the 3.7 million subscribers Sirius added in 2006 came from fans of Stern signing up to listen to his show. [edit] Martha StewartIn April of 2005 Sirius satellite Radio signed a 4 year $30 million exclusive contract with Martha Stewart. The deal created Martha Stewart Living Radio. The channel is dedicated to all things Martha and features shows hosted by Martha herself, Alexis and Jennifer, Dr. Marty Goldstein, Tracie Hotchner, Greg Kleva, Dr. Shawn Messonnier, and Sandy Gluck. [edit] Competition from iPodsOne of the biggest competition Sirius faces is indirect competition from Apple's iPods. iPods provide an alternative to satellite radio for consumers desiring large amounts of digital music that can be played through their automobiles' audio system. Apple's iPod enjoys a significant installed base (over 100 million sold since its release in 2001), and sales for the iPod continue to grow. Apple has partnered with automobile manufacturers to produce cars that have audio systems compatible with iPods. Major auto companies such as BMW, Mercedes-Benz, Honda, and Volkswagen have installed iPod-compatible interfaces into their cars' audio systems. In addition to factory-installed compatibility, an abundance of aftermarket accessory kits enable consumers to play the music from their iPod in their cars. As sales of iPods continue to grow and more consumers decide to purchase cars with iPod compatibility or iPod car accessories, fewer consumers may purchase subscriptions with satellite radio providers. [edit] Other CompetitionTerrestrial AM/FM Radio Terrestrial AM/FM radio has had a well established market for its services for many years and offers free broadcast reception paid for by commercial advertising rather than by a subscription fee. Many radio stations offer information programming of a local nature, such as local news and sports, which Sirius does not offer as effectively as local radio. The AM/FM radio broadcasting industry is highly competitive with respect to listeners and advertising revenues. Some radio stations also have begun reducing the number of commercials per hour, expanding the range of music played on the air and experimenting with new formats in order to compete in the audio entertainment sector. Several major radio companies have launched advertising campaigns designed to assert the benefits of traditional local AM/FM radio. On average every U.S. household has five AM/FM radios, and radio comes as a standard feature in every vehicle manufactured without an additional cost to the consumer. HD Radio While most traditional AM/FM radio stations broadcast by means of analog signals, the radio industry has made significant strides in rolling out advanced digital transmission technology. Digital broadcasting offers higher sound quality than traditional analog signals and the multicast of as many as five stations per frequency, significantly increasing the quality and quantity of content available to consumers. Digital radio broadcast services have been expanding, and an increasing number of radio stations in the U.S. have begun digital broadcasting or are in the process of converting to digital broadcasting. Over 1,500 radio stations in the United States currently broadcast digitally. Digital radio is generally offered to subscribers without a service charge. BMW offers factory-installed HD radio receivers as an option across all of its 2008 model year vehicles, Ford currently offers HD Radio as a dealer installed option for the Ford, Mercury and Lincoln brands and recently announced the availability of factory installed HD Radio technology as a standard or optional feature on Ford, Mercury and Lincoln vehicles beginning in calendar year 2009, and retail HD radios are available nationwide at many large retailers. A number of leading radio broadcasters have joined together to form the HD Digital Radio Alliance to accelerate the successful rollout of digital radio. Digital Music Devices such as iPods and MP3 Players Sirius faces vigorous competition from various digital music devices and their associated services. The Apple iPod ® , a portable digital music player, allows users to convert music on compact discs to digital files and to download and purchase music and video through Apple’s iTunes ® Music Store. iPods ® are compatible with many car stereos and home speaker systems. Apple has reached agreement with automobile manufacturers to preinstall equipment in vehicles which will allow users to play music from their iPod through the automobile sound system. Many MP3 players can be connected to online music subscription services, such as Real Network’s Rhapsody and Napster 2.0. Slacker, a recently launched private company, has introduced a device and music service that continually updates the device based on a user’s preferences, serving algorithmically determined playlists that are direct substitutes for radio programming. Internet Radio Consumers are increasingly turning to Internet radio. Internet radio broadcasts have no geographic limitations and can provide listeners with radio programming from around the country and the world. Improvements from higher bandwidths, faster modems, wider programming selections, and industry consolidation have made Internet radio a more significant competitor for listening in the home and office. Technologies like WiMax will also make Internet radio more pervasive. In addition to the many free Internet streams offered by radio companies like Clear Channel, CBS Radio or other smaller companies, subscription Internet music services, such as Rhapsody and Pandora, offer unlimited and fully-customizable play lists for a small fixed fee per month. These services may be used for listening at PCs or home media centers. Wireless Phones Several of the largest wireless providers currently offer music to mobile phones. Additionally, many phones now contain FM radios. Sprint Nextel currently offers streaming music from a variety of providers plus a music store for purchase. Verizon Wireless offers the VCast music service that can be played directly on a phone. AT&T offers a variety of streaming content and has also partnered with Apple to offer the iPhone. Several subscription music services, including Rhapsody and Pandora, are offered over mobile phones. [edit] Risk from satellite damageSirius is completely dependent on its satellites in order to provide service to customers. It currently operates on a system with three satellites in orbit wherein at least two of the orbiting satellites are broadcasting service to the United States at any point in time. Sirius also has one extra satellite in storage in case one of its current satellites fails. If one of its satellites were to become damaged and either need substantial repairs or replacement, its service capabilities would be seriously impaired for at least six months after the damage was done. If two of its satellites were to stop functioning within the same time period, then Sirius would have to suspend its service for approximately two years, which would be disastrous for its business. The odds of any of its satellites failing are uncertain, but in the past they have had problems with circuit failures in their satellites' solar panels. Sirius has not released any statistics on the likelihood of more problems with its satellites but has recognized that there are uncontrollable elements to the operation of their satellites that could cause them to cease functioning. Currently, Sirius 1, Sirius 2, and Sirius 3 are in orbit and broadcasting. Sirius 4 is a ground spare that is fully paid for. Sirius has also already paid for the launch of a satellite. Sirius 5 is under construction and is about 75% complete. Sirius 5 will have a geo-stationary orbit. Sirius has already contacted for the construction of Sirius 6, which at this point is anticipated to be an elliptical orbiting satellite much like Sirius' first three satellites. Sirius has announced that they anticipate their next satellite launch to be in early 2009. Sirius has contracted for one additional launch beyond Sirius 6. Sirius' satellites are constructed by space Systems Loral, and Sirius has launch contracts with ILS. Sirius has a $100 million credit facility with Space Systems Loral. [edit] High subscriber acquisition costsSince its inception, Sirius has operated with significant losses, with total operating costs nearly twice as large as total revenue in 2007. Sirius has seen decreasing net losses over the last three years as subscriber acquisition costs have fallen and revenue per subscriber has increased. SAC is mostly composed of subsidies and commissions paid to its manufacturers, distributors, and partners in the automobile manufacturing industry for the sale and installation of Sirius radios. SAC also includes other costs such as those related to product warranty, but does not include other costs such as pure production costs or marketing expenses. Sirius's SAC in 2007 was $101 for every gross additional subscriber, compared to total revenue per subscriber of $153 (these costs don't account for other hefty costs such as marketing and programming costs). For the first time since its inception, Sirius saw higher revenue per subscriber than subscriber acquisition cost. The merger with XM could help Sirius achieve profitability as the two companies combine their subscriber base and lower redundant operating costs.  [edit] Low customer retention ratesLowering SAC must be done in conjunction with maintaining a customer retention rate high enough to move the company to positive operating margins. For instance, the average customer would generate $210 in revenue over a 2 year period given 2006 figures--ostensibly enough to make up for a $114 SAC and cover other operational costs. As seen in the table below, the number of customers deactivating their service has grown as a percentage of new customers signing up from 2004 to 2006. Sirius Churn Rates (1000s of Subscribers)
Source: Annual Report Sirius calculates churn by taking the number of deactivated subscribers divided by the average quarterly subscribers. This gives Sirius a average monthly churn calculation. By this method, the average monthly churn for 2007 was 2.2% per month. This figure is termed as "Fully Loaded Churn" because it includes deactivations of subscribers coming off of OEM trial periods that elect not to continue the service. Sirius discloses their "Self Paying" churn as 1.6%. Self Paying churn includes only those subscribers that deactivate that are paying for the service themselves. The self paying churn has been consistent over the years, while the "Fully Loaded" churn has increased. The increase in Fully loaded churn is attributable to a larger amount of subscribers coming from the OEM channel and getting a trial subscription that they do not have to pay for. [edit] CompetitionSirius's only direct competition came from XM Satellite Radio (XMSR), the only other satellite radio service provider in the United States. However, Sirius bought XM for $2.76B in July 2008. [edit] Before the MergerXM leads Sirius in terms of revenue, subscriptions, and operating income. Key industry metrics that XM has advantages over Sirius include average monthly churn, which is the percentage of subscribers that deactivate their service in a month, and subscriber acquisition cost, which is the average cost of acquiring and activating an additional customer. In 2007, Sirius's average monthly churn was 2.2% while XM's was only 1.75%, significantly better considering that XM has over 700,000 more subscribers than Sirius. It should be noted that the two SDARS companies report churn rates in different manners. XM reports "self paying churn", which does not include deactivaions of subscribers who elect not to keep the service after the trial period. Sirius reports "fully loaded churn", which includes all deactivations in the churn number. In 2007 Sirius reported fully loaded churn of 2.2% and self paying churn of 1.6%. Despite being behind XM in most areas, Sirius does have a higher average revenue per user (ARPU) figure than XM. Sirius has been closing the gap between itself and XM in recent years, especially in terms of subscriptions and operating margin. This competition may come to an end if the proposed merger between the two companies is approved and completed during 2008.
Note: All figures as of end of 2007.
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