Thursday, May 10, 2012

Sirius Questions

I rarely discuss individual stocks, and when I do I try to apply common sense to my thought process.  When I look at myself as a consumer and an avid technology user, I cannot understand how the Sirius XM Radio Inc. (SIRI) subscriber base can go grow or be sustained at current levels going forward.

My friends and I have a simple philosophy when it comes to looking at publicly traded companies.  That philosophy is if someone else is giving consumers access to a very similar high quality product for free, for that which you are charging access to, then your business will ultimately fail.  I have been buying new vehicles for the last decade, and they all came with a free subscription to satellite radio.  I have never once bought a subscription after the free trial period.  You would think I am the ideal consumer for the likes of Sirius.  I am in my late 30’s.  I am tech savvy, and huge music and sports fan.  Yet I have never felt the need to spend extra money for content that I can access, for the most part, for free.

A decade has gone by and advancements in technology have increased.  This increase in technology has made paying for Sirius’ content even more of a question mark for me.  Almost every new vehicle today comes with a streaming feature that allows you to stream audio content from your smartphone to your vehicle speakers.  If your vehicle does not offer this feature then you can still achieve this with the use of an auxiliary cable that cost just a few dollars.  With my iphone I am able to stream and listen to several music services and radio stations that play the same content as the music stations I listened to on Sirius.  On my iphone, for free, I currently use the following applications that allow me to achieve this:

-        Shoutcast not only allows me to listen to whatever genre of music I wish but I also have free access to ESPN Radio

-        AOL Radio

-        iHeartRadio gives me access to hundreds of public radio stations

-        Pandora

-        Jango

In addition to these app’s I am also able to access several radio stations directly from app’s they have created.  For example, I am able to listen to one of my favorite radio stations, which is located almost 3000 miles away from where I live.  The same access to this content can be achieved in my home.  With numerous media servers available and applications on my iphone, such as AirMusic, I have around the clock access to this content.  More and more consumers are becoming increasingly more comfortable with the various free options available to them, and that is not good for the future of Sirius subscriptions.

Now, what is the one drawing card that Sirius offers that cannot be accessed for free?  Howard Stern.  I believe Howard has been the only reason satellite radio has been able to survive this long.  However, what does a future look like without Howard Stern?  I love Howard Stern, but there are two facts about his show.  1)  If you can’t live without Howard, and he is the only reason you subscribe to Sirius, you could just as easily buy a subscription to Howard TV from you cable or satellite provider.  This gives the consumer complete access to everything Stern Show for about $80 less per year than a Sirius subscription, and 2) The drawing card will not be on the air forever.  All die hard Howard fans know he is winding down his radio career.  The number of hours he does on the show have drastically gone down the last ten years, and all fans know he has hinted many times that he is ready to move on to new adventures and challenges; ie America’s Got Talent.

The challenges the Sirius business model faces are obvious, which is why the street has priced the stock near $2 per share.  What is less obvious is the desire Liberty Media (LMCA) has to acquire this headache.  The immediate benefit is in the numbers when you know John Malone’s aversion to paying taxes and love for free cash flow, and Sirius offers both with positive free cash flow and negative earnings.  However, without an immediate plan to combat the other free choices available for consumers, and the one day departure of Howard Stern, I do not see this potential takeover as a long-term positive for Liberty.

Thank you and good luck everyone!

Disclosure:  I do not have a long or short position in SIRI and do not intend to establish one for any reason.

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”