Blog : Satellite Radio's Swan Song

by Peter Leeds on February 18th, 2009

Satellite radio is dead. Most would say "it's not dead yet," but those are the same people that thought the merger between Sirius and XM would save the companies.

A few months before the merger announcement, the shares were trading at $3 (SIRI) and $12 (XMSR). Trading under $5 per share, Sirius was a penny stock. XM had not yet made that distinction, but certainly would soon enough. As The Penny Stock Professional, any shares that trade under $5 fall onto my radar, but it literally took me about 25 minutes to realize that these companies were both dead, and once they merged, they were even deader.

I remember that investors were all abuzz. They acted like the merger between the two companies was the last piece of a puzzle that would make every shareholder rich.

That's when I wrote SIRIus Trouble, my July 30th, 2007 Blog entry at www.PeterLeeds.com. I felt it was my duty to cut through the hysteria, and hopefully protect some investors in the process.

You can read the whole Blog entry at PeterLeeds.com, but here are some excerpts:

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The possible SIRI / XM merger does not solve the underlying financial turmoil of the company. Traders have factored it in to share prices as if it will somehow wipe out an absolutely inexcusable balance sheet.

New Subscriber Sources:

The majority of new subscribers are now coming by default, by buying a car with SIRI thrown in as a perk. These subscribers are more likely to cancel, and many of them do not even pay for the first year. Once they do, they are getting discounted promotional rates. This translates into smaller revenues per user.

Subscriber Drop Off:

SIRI is getting a fraction of the new retail subscribers they did last year. This is because they have maxed out the 'early adopters,' which generally equates to 5% of the total market. Many companies have a major hurdle getting to the next 5%.

Financial Health:

SIRI is just another case of spending $1 to make 50 cents. Anyone can spend $1 billion to figure out how to make a few hundred million.

After extensively looking at the financials of both companies (SIRI and XMSR), XM is in much better financial health than Sirius. However, they are both pretty brutal.

So, what do you get when you combine two financially suspect companies? One bigger financially suspect company.

My only caution to investors would be: don't read too much into the potential merger. Traders are factoring it in to the market as if it will save the two satellite radio companies. It won't, not by itself anyways.

Here's what will happen in my opinion:

Option 1: They merge or one goes under, then via creative financings (such as issuing shares), they heavily dilute the company. The surviving company steams on, but the value of the shares are worth significantly less than they are now.

Option 2: Bankruptcy is declared, but the technologies and bones of the company are attributed to a new corporation. Shareholders lose 100% of their investment. The new company gets to start where they are right now (subscribers, agreements, programs), only now they have no debt.

Unfortunately for investors, Option 2 would be a good move from a corporate perspective. If you could dump over a billion dollars in debt, just by filling out some paperwork, would you?

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Now, just when a huge portion of SIRI's debt is coming due, and the company would have declared bankruptcy within the next week or two, along comes Liberty Media. Armed with bags of cash, they throw SIRI a lifeline, temporarily delaying the eventual and almost certain bankruptcy (in my opinion).

It was a bad move, which did little more than create $7.48 billion in total liabilities. By create, I mean that a bankruptcy would have wiped the majority of that debt off the books. The company would be restructured, and start from scratch without all the going issue concerns, interest payments, and as I said in SIRIus Trouble, "an absolutely inexcusable balance sheet."

So, what's the next industry to go the way of satellite radio? I'm thinking it may be social media. Sites like Facebook, LinkedIn, Twitter, and Digg. They're not going to disappear completely (although Twitter will), but they have some things going against them:

• they will have an extremely difficult time monetizing
• adoption and activity levels are falling off fast

They aren't sure how to make money. They have ideas, and they will make some profits, but nothing near what such a monumental social fad deserves.

The hype about these sites has been extreme, and has started to show signs of fading. People who spent all day at work surfing Facebook have now reconnected with everyone, and are less active. You'll see some stats about drop-offs in Facebook traffic in the media within six to twelve months.

The saving grace for these social networking sites is that business will use them, which will extend their moment in the sun for as much as 18 months. Then, the high level of business use will hit a tipping point, changing the entire purpose and culture of the sites, thereby disenchanting their retail subscribers, and starting a long and drawn out withering process.

Despite my pessimistic stance, I've finally set up a couple of accounts for myself, and invite anyone to connect with me online. Click here to befriend me on Facebook.

You can also connect with me on LinkedIn, just make sure to contact the correct Peter Leeds! There's a few of us.

For shareholders of SIRI, yes, if the company followed my advice and declared bankruptcy, shareholders would be out of luck. Although, I'm not sure how much equity most investors have left in this penny stock anyway, with recent prices as low at 13 cents, down from post-merger highs near $4.00.

Liberty Media can go down with the ship if they want to (and apparently the do). SIRI has a business model that's full of holes, assumptions, and speculation. By the way, in the time I took to write this article, SIRI is down another $64,000, after income.