Sirius: How Special New Contracts Will Boost Profits
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Can Sirius XM Radio (NASDAQ: SIRI) ever rev up the rockets enough to propel the satellite and related stock price out of its current stationary orbit? With 21 million paying subscribers and a basic monopoly in the satellite radio space – one would think that this stock is a no-brainer, but as most investors will begrudgingly attest, this is not the case at all.
Sirius XM is notorious for epic good news / bad news situations on a weekly basis. As soon as shareholders applaud a special new deal with Toyota, they get hammered with horror stories about Sirius XM’s CEO, Mel Karmazin being voted one of the worst CEO’s in the country. A new deal surfaces with Major League Baseball, and as opening day pitches reign supreme, fans of the web-based radio all-star, Pandora (NYSE: P) start trumpeting its dominance in the streaming music space. Let’s try and make sense of all this for a more educated look at 2012 ear candy.
Before we recap Sirius XM’s run from zombie to hero – its important to note that the company recently filed an antitrust lawsuit against Sound Exchange hoping to establish reasonable music licensing and royalty fees going forward. Sound Exchange has indicated it wants between 13% and 20% of gross revenues as the royalty rate for Sirius XM. This is a significant increase over Sirius XM’s current rate (8% of certain revenue) that it has been paying which expires later this year. Watch this outcome closely, as everyone in the digital music space from Sirius XM to Pandora relies on these fees for the content they all share. Pandora’s current deal with Sound Exchange expires in 2015.
Flashback to February 2009 and Sirius XM stock was trading at a low of $.10 while narrowly avoiding bankruptcy. Over the past three years the stock has made a lot of investors a lot of money. The stock closed out 2011 by adding another 1.7 million new subscribers with a recent share price of $2.25.
Risk/reward investors that took a chance and invested in the company when it was gasping for a last breath of new subscriber revenue have been rewarded with a king’s ransom. Just look at Liberty Media (NASDAQ: STRZA), which stepped up at a very shaky time and took a chance by lending Sirius the funds necessary to get the company through its liquidity crisis. Liberty now owns a 40% stake in Sirius XM (worth $6 billion) and speculators all wonder what Liberty will do next.
As many investors have learned, a key driver of digital music growth is the auto industry and the old guard in this space, Sirius XM, does have a substantial first mover advantage here with several partnerships in place. Sirius XM generates about 94% of its revenue through subscriptions with most of this revenue stemming from deals with automobile manufacturers that install Sirius XM radios pre-sold in cars. Approximately 53% of Sirius XM’s subscribers were from OEM automobile sales. The company shares a portion of subscription revenue with its automotive partners, including every major player from BMW to Volkswagen. Sirius XM enjoys an exclusive deal with the Ford Motor Company and all of its brands (Lincoln, Mercury, Volvo, Land Rover, Aston Martin, Jaguar, and Mazda) until the fall of 2016.
Unlike Sirius XM, the hard charging Internet radio pioneer that is Pandora must rely on advertising sales to feed its volatile stock price. With 68% of the Internet radio market wrapped up, Pandora excels at grabbing new listeners with a current tally of 125 million registered users in play. Unfortunately, Pandora embraces a “freemium” model and the company is still chasing real profits. With rising fears concerning the ability to ever reach profitability, Pandora stock hit an all time low of $9.03 on Monday.
Regardless of Pandora’s profit concerns, Sirius XM is still focused on challenging the swelling Internet radio presence by Pandora, Spotify and others. Sirius XM is growing its online offerings by adding new content like full NASCAR coverage, every Major League Baseball game and exclusive concerts by the likes of Paul McCartney, Bruce Springsteen and other legends.
Sirius is in the business of providing curated content to its subscribers and I personally wonder why the company doesn’t embrace a model similar to YouTube's new original programming tactic. Youtube, which is owned by Google (NASDAQ: GOOG), has just started launching more than 100 new video channels based on original programming from creators ranging from Madonna to The Wall Street Journal. The partners include an array of Hollywood production companies, celebrities and new media groups that will produce mainly niche-oriented videos.
YouTube is shelling out $100 million to producers with advances as high as $5 million per channel, according to people familiar with the matter, who spoke on condition of anonymity. The money is an advance on advertising money the videos will bring in, and Google will recoup its portion first before splitting the proceeds.
In summary, if Sirius XM can negotiate reasonable costs with Sound Exchange in its recent antitrust lawsuit focused on royalties, and if the company can tap its new Toyota contract to reach its goal of 1.3 million subscribers in 2012 – things might get interesting. With no debt coming due this year, an improved balance sheet and a watchful eye on YouTube’s new original programming strategy – 2013 might just show a stock price trajectory worthy of the company’s rocket boosters that launched the original satellites into orbit.
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